The Neoclassical School

Abstract

From an economic perspective, it is safe to say that the most important events in the entire history of humanity have taken place during the last 300 years or so. The Industrial Revolution, which begun in the 18th century, ushered the beginning of some great transformations in human society. As the steam engines became widely used in the late 1780s, a new production system developed. The entrepreneur who owned these machines housed them in factories and hired independent workers and artisans who performed specific tasks on the site in return for a wage, with the implicit and explicit recognition that they had lost any claim over the product of their labour. That product had become the exclusive property of the factory owner, who would then sell it in the market for a price that guaranteed him a profit. This period marked the birth of the factory system - or industrial capitalism, whose development required further mechanization and rationalization of work, expansion of the factory and larger pools of labourers and their concentration in towns and cities. It was during this period that the ideas of 'efficiency' and 'productivity' became key concepts and played an important role in the shift to the system of 'mass production', which allowed the extraction of the maximum effort of the workers and hence the maximum benefit from their labour power. Chapter 2 showed that income distribution among social classes was a major preoccupation of the classical economists. In their theory of income distribution, classical economists recognized this division of national income among social classes (workers, landowners and capitalists) and attempted to study its implications on accumulation and economic growth. Ricardo (1817), in particular, maintained that there was an inverse relationship between wages and profits, and argued that, since profit is the source of investment, the tendency of wages to increase would lead to a fall in the rate of profit and cause a slowdown in capital accumulation and progress; and thus lead to a stationary state of the economy. Ricardo also considered that there was a conflict between the interests of the capitalists and thelandlords. This is why he argued for the abolition of the laws restricting the importation of corn and foodstuffs. He maintained that these laws served to protect the rent of the landlords, and that they would result in higher prices of corn, push the subsistence wage to rise and cause profits to fall. These arguments served as the basis of his support for the capitalist class and his defence of free trade and the principles of laissez-faire.