The classical economist, Merchantalism, Phisocrats,

2.  Classical economics, developed in the 18th &
19th Centuries, included a value theory and
distribution theory.
 The value of a product was thought to depend
on the costs involved in producing that product.
 The explanation of costs in classical economics
was simultaneously and explanation of
distribution.
 A landlord received rent, workers received
wages and capitalist tenant farmer received
profit on their investment.

3. Adam Smith

4. Adam Smith
 Scottish economist as well as Moral Philosopher.
 Education Glasgow University and Oxford
University.
 Wrote :
- 1759 : Theory of Moral sentiment
Ex. For preparation of bread needs a labour
- 1776: Wealth of Nations.

6.  Labour is the source of a Country‟s wealth.
 Wealth should be increased by the division of
labour.
 Free competition ensured that prices were set
freely.
 Encouraged free international trade.
 Role of the Government – defense, education &
Education.
 Favoured taxation of rent to fund government
and developed canons of tax: Equity, economy,
convenience and certainty.

7. The Wealth of Nations
(Benefits of free trade)
 The pursuit of self interest, “What benefits the
individual best benefited the society.”
 Division of Labour:
Increased productivity increased the
wealth in a country. Example with the manufacture
of Pins.
 The Labour of value theory:
The value of an item was equal to the
amount of labour that went in the producing the
product. The value of anything is equal to the
labour it can save you.

8. Productive and Unproductive Labour
 Productive labour:
eg. Manufacture in Chair: It is long term work.
 Unproductive Labour:
eg. Services provide
 Adam Smith:
He did not believe in any need of separate
theory for population.
 According the Adam Smith population adjusts itself
according to demand and supply.

15. Phisiocrates:
 Phsiocrates were a group of Economists who
believed that the wealth of Nations was derived
solely from Agriculture.
 Their theories originated in France and were
most popular during the Second half of the 18th
century Phisiocracy was perhaps the First well
developed theory of Economics.

16. Continue……….
 The Phisiocrates saw the true wealth of a
nation as determined by the surplus of
Agricultural Production over and above
that needed to support Agriculture.

18. Thomas Robert Malthus
Born: 13 Feb. 1766
Nationality : British
Influences: David Ricardo, Jean Charles
Field: Political economy and demography

19. Thomas Robert Malthus
Why are we studying the theories of population?
We can see a rapid increase in the
population of various countries from time to time.
Many countries have a large resources but the
people to use those resources are not in the
same proportion and vice-versa.

20.  So the growing population is a boon or a bane
from a economy is a big question from early
ages.
 Problem of population has gained attention of
various economists from ages.
 They are eager to know and study the effects of
population on a country and its economy.

22. Thomas Robert Malthus was the first
economist to study the problem of increasing
population. He was the first person who
understood that there is a need for separate
theory for population.

23. Background of Malthusian Theory of Population
Malthus gave theory of population due to
three reasons:
 When Malthus propounded this theory at that
time Europe was facing Napoleonic Wars. There
was lot of problems and poverty. The production
of food grains and other resources have
reduced due to war. On one hand there was
Economic „Dis-satisfaction‟ due to reduction of
resources and on the other hand the problem of
unemployment enlarged.

24. Continue………..
 „Industrial Revolution‟ begin with a lot of
difficulties. There was no significant
increase in the means of subsistence but
the population was increasing at a high
pace.

25. Continue……
 Third reason for publishing the book by Malthus
was due to the publication of the book “An
Enquiry into Political Justice” by William
Godwin. Godwin was optimist so he explained
the positive side of population and believed in
human perfectibility and enlightenment. But
Malthus was pessimist and didn‟t agreed with
Godwin‟s concept.

26. Continue………….
 So to explain the dark side or negative side of
population Malthus published a book “An Essay
on the Principles of Population” in the year 1798.
The language of the book was effective and
tough. But there was no name of Malthus in the
book.
 The after 5 years he published another book “An
Essay on the Principles of Population as Affects
the Future Improvement of Society” in the year

27. Different Theories of Population:
There are two important theories
of Population –
A. Malthusian Theory of Population
B. Optimum Theory of Population

28. Overview of Malthusian Theory of Population
 Though the problem of increase in population
was Centre of Interest for many economist. But
Thomas Robert Malthus was the First economist
who gave a definite theory of population. Thus
the Malthusian theory has a very important place
amongst the theories of population.

29. Continue………….
 Malthus gave his theory by comparing the
increasing population and the food grains. He
said that the population tends to grow much
faster than the growth of food supply. So after a
limit there will be no food grains left for the
growing population.

32. Explanation of Malthusian Law of Population or
Theory of Population
1. Relation between food grains and increase in
population
1. Population tends to increase with high rate in
comparison to food grains.
2. To explain this tendency Malthus used a
mathematical approach. He explained that the
population increases in geometric progression‟
(1,2,4,8,16, 32 etc.) and food grains increases
in „arthmetic progression‟(1,2,3,4,5,6 etc.)

33.  The fecundity of human being is so intense that
if there is no restriction then the population of a
country will double itself at every 25 years.
 Law of Diminishing Return applies in
Agriculture.
eg.: Land : Continue given the production in same
land, production capacity is low and hence
foodgrain production is low.

34. 2. Positive Checks and Malthusian Cycle:
To control the overpopulation nature takes
action and results in to flood, starvation,
earthquake, war etc. resulting into huge loss and
untimely death.

35. David Recardo (1772-1823)

37. David Recardo (1772-1823)
 Son of Jewish immigrant stockbroker.
 He was third of 17 children from a Sephardic
Jewish family.
 Recardo was a close friend of James Mill,
who encouraged him in his political
ambitions and writings about economics.
 Died on September 11, 1823 at his estate in
Gloucestershire.

38.  Ricardo‟s economic career focused on inflation
in the distribution of income.
 He believed that increasing the money supply
during the bullion controversy caused inflation.
 Malthus and Ricardo had differing views of
economics and debated till Ricardo died.

39. Theory of Distribution
Factor of Production
 Land
 Labour
 Capitalists
Three Classes of People
 Landlords
 Workers
 Capitalists
Note: Landlords earn Rent
Labourers earn Wages
Capitalists earn profits

40. Recardian Assumptions of the Theory
 That all land is used for production of corn and
the working forces in agriculture help in
distribution in the industry.
 That the law of diminishing returns operates
on land, that the supply of land is fixed.
 Demand of corn is perfectly inelastic.
 The labor and capital are variable inputs.

41. Continue…………
 The capital consist of the circulating capital.
 State of technical knowledge is given.
 All workers are paid a subsistence wages.
 Supply price of labour is given and constant.
 Accumulation results from profits.

42. Recordian theory of rent:
 Rent is associated to land.
 The cost of the use of land is rent
 Supply of land is fixed.
 It is price inelastic.
 The value of land use is zero.

43.  “Portion of the produce of the earth which is
paid to a landlord on account of the original and
indestructible powers of the soil.
 Recordo in his theory of rent has emphasized
that rent is reward for the services of land which
is fixed in supply.

44. Continue…………
 Secondly, it arises due to original
qualities of land which are indestructible”
(The original indestructible powers of the
soil include natural soil, fertility, mineral
deposits, climatic conditions. etc.)

45. Assumption of Rent:
 No Alternative use:
It has assumed that land has no
alternative use as it used only for farming.
 Difference in Fertility:
The theory also assumes that fertility
differs from land to land. It means some pieces of
land are more fertile as compared to other pieces
of land.

46. Continue…………
 Law of Diminishing Return:
The theory assumes that law of
diminishing returns holds in agriculture. It
states that output will not be increasing at the
same rate at which labour and capital
increases.

47.  Increase in Population:
The population of the country increases
continuously which results in an increase in
agricultural production to feed the larger population.
 Long Run:
The Recardian theory of rent is based upon
the assumption of long period. This assumption is
basic to the classical economics.
 No rent Land:
The Ricardian theory assumes the existence
of no-rent land which does not enjoy any rent.

48.  Scarcity of land:
The Ricardian theory assumes that the
supply of superior grade of land is limited.
 Descending order of Cultivation:
Theory assumes that different tracts of
land are brought under cultivation in a
descending order of fertility. “The most fertile
and most favorably situated land will be first
cultivated”.

50.  Jean-Baptiste Say(1776-1832) was a French
businessman.
 Say was also responsible for introducing the
concept of entrepreneur into economics.
However, he is best known for his “law of
markets” or Say‟s law, which states:
“Supply creates it‟s own demand”.

51. Introduction of Say‟s Law
 Say‟s law of market is the core of the classical
theory of employment. There cannot be general
overproduction and the problem of redundancy
in the economy. Conversely, if there is general
overproduction in the economy and then some
laborers may be asked to leave their jobs there
may be the problem of unemployment in the
economy sometime.

52. Continue……….
 In the long run the economy will automatically
tend toward full employment. In say‟s words, “It
is production which creates market for goods. A
product is no sooner created then it, from that
instant, affords a market for other products to
the full extent of its own value. Nothing is more
favorable to the demand of one product through
supply another.”

53. Production Creates Market(Demand) for Goods:
 When producers obtain the various inputs to be
used in the production process, they generate
the necessary income. For example, producers
give wages to labourers for producing goods.
The labourers will purchase the goods from the
market for their own use. This, in turn, causes
the demand for goods produced. In this way,
supply creates its own demand.

54. Barter System as its Basis:
In its original form, the law is applicable to
a barter economy where goods are ultimately sold
for goods. Therefore, whatever is produced is
ultimately consumed in the economy. In other
words, people produce goods for their own use
sustain their consumption level.

55. Continue…………..
 Say‟s law, in a very broad way, is as Prof. Hansen
has said “a description of a free exchange
economy. So conceived, it illuminates the truth
that the main source of demand is the flow of
factor income generated from the process of
production itself. Thus, the existence of money
does not alter the basic law.

56. Labour Market:
Prof. Pigou formulated Say‟s law in terms of
labour market. By giving minimum wages to labourers
according to Pigou, more labourers can be employed.
In this way, there will be more demand for labour.
Unemployment results from rigidity in the
wage structure and interferences in the working of
the free market economy. Direct interference comes
in the form of minimum wage laws passed by the
state. The trade unions may be demanding higher
wages more facilities and reduction in working hours.

57. Saving-Investment Equality:
Income accruing to the factor owners in
the form of rent, wages and interest is not spent
on consumption but some proportion out of it is
saved which is automatically invested for further
production. Therefore, investment in production
is a saving which helps to create demand for
goods in the market. Further, saving- investment
equality is maintained to avoid general
overproduction.

58. Rate of interest as a Determinant Factor:
Say‟s law of markets regards the rate of
interest as a determinant factor in maintaining
the equality between saving and investment. If at
any given time investment exceeds saving, the
rate of interest will rise. To maintain the equality
saving will increase and investment will decline.

59. Continue……………
This is due to the fact that saving is regarded
as an increasing and investment will decline. This is
due to the fact that saving is regarded as an
increasing function of the interest rate and
investment as decreasing function of the rate of
interest. Alternatively, when saving is more than
investment the rate of interest falls, investment
increasing and saving declines till the two are equal
at the new interest rate.

60.  Laissez-Faire Policy of the Government:
There is no government intervention in the
in the economic field. The government follows a
laissez-faire policy to facilitate automatic
adjustment and smooth working of the market
mechanism in the capitalist economic system.
 Long-Term:
The economy‟s equilibrium process is
perceived from the long-term point of view.

63.  John Stuart Mill has born in London on
May 20, 1806, and was the eldest of son
of James Mill.
 He was educated entirely by his father,
James Mill.
 British Philosopher, Political economist
and civil servant.
 Contributor to social theory, political
theory, and political economy.

65.  A 19th Century English Philosopher, born in 1806.
 He became a secretary and research assistant to
his father.
 At the age of 17 he entered employment of East
India Company.
 Mill suffers a Nervous Breakdown at the age of 21.
 He goes into a long period of Mental Depression.
 Mill recovers from this depression by reading
poetries of Wordsworth.
 After his recovery he has a totally transformed
vision of life.

66. Dr. Devyanee K. Nemade
Assistant Professor
Department of Agricultural
Economics & Statistics
Dr. PDKV, Akola