CPE/ CTW Readings Summaries
Comparative Political Economy – Week 2
Lecture 2 Readings
Chang, H.J. 2014:
Chapter 1
The standard Neoclassical definition of economics, the variants of which are still used, is given in
the 1932 book by Lionel Robbins, An Essay on the Nature and Significance of Economic Science.
In the book, Robbins defined economics as 'the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses'.
In this view, economics is defined by its theoretical approach, rather than its subject matter.
Economics is a study of rational choice, that is, choice made on the basis of deliberate,
systematic calculation of the maximum extent to which the ends can be met by using the
inevitably scarce means.
An obvious alternative definition of economics, which I have been implying, is that it is the study
of the economy.
Different aspects of the economy:
o Economy is about money
o Getting money through jobs
Wages and working conditions are also affected by ‘political decisions’; so
boundary between economics and politics is blurry
o Getting money through transfers
From people you know
Charitable giving
Government schemes:
Some to give money to those in worst positions
Some richer societies have more comprehensive schemes [welfare
state] based on
o Progressive taxation = those who earn more pay more of their
income in taxes [proportionally]
o Universal benefits = everyone, not just poor, entitled to
minimum income
Resources earned or transferred get consumed in goods or services
A lot of economics devoted to study of consumption
Realm of production – more or less neglected area of economics
Chang views production as ultimate foundation of economy
Changes in sphere of production have been most powerful sources of
social change
Main argument by Chang: Economics shouldn’t be defined by its methodology/theoretical
approach should be defined in terms of its subject matter like all other disciplines
The subject matter of economics should be the economy - which involves money, work,
technology, international trade, taxes and other things that have to do with the ways in which
we produce goods and services, distribute the incomes generated in the process and consume
,CPE/ CTW Readings Summaries
the things thus produced - rather than 'Life, the Universe and Everything' (or ‘almost
everything'), as many economists think.
As they define economics in terms of its methodology, most economics books assume that there
is only one right way of ‘doing economics’ – the Neoclassical approach
Neoclassical one.
By defining economics in terms of the subject matter, this book highlights the fact that there are
many different ways of doing economics, each with its emphases, blind spots, strengths and
weaknesses. After all, what we want from economics is the best possible explanation of various
economic phenomena rather than a constant 'proof' that a particular economic theory can
explain not just the economy but everything.
Chapter 4
Boundaries between 9 different schools of thought are fuzzy; mostly important to recognize that
there are distinctive ways of conceptualizing and explaining the economy
No monopoly over truth; because no theory is good at explaining everything as theories
necessarily involve abstractions
Schools are more established then traditions
9 different schools:
1. Classical School
Market keeps all producers alert through competition, so leave it alone
Classical school of political economy, founded by Adam Smith (1723-90)
Key arguments:
The invisible hand: pursuit of self-interest by individual economic actors
produces socially beneficial outcome possible through power of
competition producers strive to supply cheaper/better things
ultimately producing products at minimum costs + maximizing national
output
Say’s Law: supply creates its own demand
Free trade
Ricardo introduced theory of comparative advantage
School viewed capitalist economy as made up of ‘three classes of the
community’: capitalists, workers, and landlords
The notion of the economy as being made up of classes, rather than individuals,
allows us to see how an individual's behaviour is strongly affected by her place
in the system of production.
Ricardo's theory of comparative advantage, while having clear limitations as a
static theory that takes a country's technologies as given, is still one of the best
theories of international trade.
Some of the theories of the Classical school were simply wrong. The school's
adherence to Say's Law made it incapable of dealing with macroeconomic
problems (namely, problems that are to do with the overall state of the
economy, such as recession or unemployment). Its theory of the market at the
,CPE/ CTW Readings Summaries
microeconomic level (namely, the level of individual economic actors) was also
severely limited.
2. Neoclassical School
Individuals know what they are doing, so leave them alone – except when
markets malfunction.
Neoclassical school arose in the 1870s, from the works of William fevons (1335-
82) and Leon Walras (1S34-1910). It was firmly established with the publication
of Alfred Marshall's Principles of Economics in 1890.
Claims to be intellectual heir of Classical School
Differences between Classical and Neoclassical school:
Neoclassical emphasized the role of demand conditions (derived from
the subjective valuation of products by consumers) in the determination
of the value of a good. Classical economists believed that the value of a
product is determined by supply conditions, that is, the costs of its
production. They measured the costs by the labour time expended in
producing it – this is known as the labour theory of value. Neoclassical
economists emphasized that the value (which they called the price) of a
product also depends on how much the product is valued by potential
consumers; the fact that something is difficult to produce does not
mean that it is more valuable.
The school conceptualized the economy as a collection of rational and
selfish individuals, rather than as a collection of distinct classes, as the
Classical school did.
The Neoclassical school shifted the focus of economics from production
to consumption and exchange. For the Classical school, especially Adam
Smith, production was at the heart of the economic system.
Nevertheless, Neoclassical school inherited and developed two central ideas of
Classical school:
The first is the idea that economic actors are driven by self-interest but
that the competition in the market ensures that their actions
collectively produce a socially benign outcome.
The other is the idea that markets are self-equilibrating.
Two theoretical developments in the 1920s and the 1930s severed the
apparently unbreakable link between Neoclassical economics and the advocacy
of free-market policies. After these developments, it has become impossible to
equate Neoclassical economics with free-market economics, as some people
still mistakenly do:
The more fundamental of these was the birth of welfare economics, or
the market failure approach
A more minor yet important modification came in the 1930s, in the
form of the compensation principle. The principle proposes that a
change may be deemed a social improvement even when it violates the
Pareto criterion (in the sense of there being some losers), if the total
, CPE/ CTW Readings Summaries
gains for the gainers are large enough to compensate all the losers and
still leave something behind.
Strengths of the Neoclassical school: precision and versatility
Limitations of the Neoclassical school: Unrealistic individuals (assumes too
strongly that people are selfish and rational), over-acceptance of the status quo
(accepts the underlying social structure) and neglect of production.
3. Marxist School
Marxist school of economics emerged from the works of Karl Marx, produced
between the 1840s and the 1860s, starting with the publication of The
Communist Manifesto in 1848 (co-authored with Friedrich Engels (1320-95), his
intellectual partner and financial patron) and culminating in the publication of
the first volume of Capital in 1867.
Capitalism is a powerful vehicle for economic progress, but it will collapse, as
private property ownership becomes an obstacle to further progress
Labor theory of value, classes, and production: The Marxist school as the truer
heir of the Classical school
Marxist school adopted the labour theory of value, which was explicitly
rejected by the Neoclassical school. It also focused on production,
whereas consumption and exchange were the keys for the Neoclassical
school. It envisioned an economy comprised of classes rather than
individuals - another key idea of the Classical school rejected by the
Neoclassical school.
Production at center of economics: economic base (mode of production), forces
of production and relations of production (superstructure)
Capitalism is seen as but one stage of human development before we reach the
ultimate stage of communism.
This recognition of the historical nature of economic problems is a great
contrast to the Neoclassical school, which considers the 'economic' problem of
utility maximization universal
Marxist School views class conflicts as central force of history
Marxist School refused to see working class as passive entity; according it active
role in history
The Marxist school has many fatal flaws. Above all, its prediction that capitalism
will collapse under its own weight has not come true
Despite these limitations, the Marxist school still offers some very useful insights
into the workings of capitalism.
Marx was the first economist to pay attention to the differences between the
two key institutions of capitalism - the hierarchical, planned order of the firm
and the (formally) free, spontaneous order of the market.
Unlike most other economists, Marx and some of his followers have paid
attention to work for its own sake, rather than as a disutility that people have to
put up with in order to earn money to pay for their consumption.
