Understanding Sustainable Development

HS 419Lecture 2

Classical School of thought, economic growth and the environment

Classical Economics

17th to late 18th century

The Classical Economics and the Environment

• The Economists who wrote between the period 1759 to 1850 formed the classical school.

• The leading members of the school were: Adam Smith (1723 – 1790), Malthus (1766 – 1834), Ricardo ((1772 – 1823) and J.S. Mill (1806 – 1873)

• The industrial revolution and the enlightenment in the 18th and 19th centuries were based on unquestioning faith in the ability of science and technology to harness nature and support ever increasing material welfare

• The classical economists set out to deal with the problems related to market economy which was rapidly emerging in England due to industrial revolution

Industrial Revolution

• The First Industrial Revolution, which began in the 18th century, merged into the Second Industrial Revolution around 1850, when technological and economic progress gained momentum with the development of steam-powered ships, railways, and later in the 19th century with the internal combustion engine and electrical power generation

Classical School (1750 – 1850)

An overview of Classical Economics • Individualistic Outlook – was concerned with

the activities of individuals • It is the welfare of all individuals that leads to

welfare of society • The wellbeing of the society is the sum total of

the well being of the individual compromising it.

Economic policy

• Followers of doctrine of Laissez – fair (economic liberty)

• Economies function best under private initiative and competitive conditions rather than under state control

• Opposed all kind of restrictions on economic activities as it hampers competition

Economic Growth

• The major concern - What determines economic growth of a capitalist economy ?

• In their view – population growth and capital accumulation are main determinants

• The forces of diminishing returns and technological improvements regulate the pace of development

• The food production is subject to diminishing return - “land is limited” but “population is increasing”

Diminishing Returns

• In Economics, diminishing returns (also called diminishing marginal returns) is the decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.

Economic growth

• There are two forces working in opposite direction – technological improvement promoting growth & the forces of diminishing returns retards growth.

• The Long run trend of the economy depends upon whether technological improvements are sufficient enough to offset the tendency of diminishing returns or not.

ADAM SMITH

Classical Economics – Adam Smith

• Policy of Laissez – faire • Invisible hand – policy of govt. non

intervention (self-regulating behavior of the marketplace. Individuals can make profit, and maximize it without the need for government intervention)

• Capital accumulation – the prime mover of the society

Capitalist Economy

Private ownership of capital and the means of production

Spread of Capitalism

• Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.

Adam Smith and economic growth

• Economic Growth – three forces regulates growth

• The law of capital formation• The law of Population growth ( different from

Malthus )• Law of diminishing returns

Law of capital accumulation

• Capital by facilitating division of labour, augments society’s production – increases the wage bill of the working force – increases demand for the product – enlarges the size of the market BUT

• Capital accumulation depends upon profit, and as wages rises , the profits will fall – so capital accumulation by raising the wages strikes at its own roots and no further accumulation is possible – growth stops !

Law of Population • Like other commodities labour also reacts to

demand. Rise in wage leads to increase supply of labour – which will lead to fall in wage and leads to higher profit again .

• So law of population ensures that the process of capital accumulation continues safely and the society progresses on an ever rising path and that too itself

Economy can grow forever