Population Theory, Labor Theory of Value, and Free Markets Theory - Essay Example

Abstract This research paper aims to compare and contrast the ancient and mercantilist ideas of Aristotle and Khaldun with their classical counterparts such as Adam Smith, David Ricardo, Thomas Malthus and Karl Marx. The focus will be on the economic perspective such as labor theory of value, the population theory and poverty and the free market theory of the monopoly, supply demand and government intervention. Introduction Abd al-Rahman Ibn Muhammad known as Ibn Khaldun laid down the fundamental foundation of knowledge, especially in the field of civilization. He significantly contributed to economics and contemporary political economy, making him the father of economics alongside Adam Smith who has a lot of great work published over the years after the death of Khaldun. He did not only for-run the development of economics but also in production, supply, costs, consumption, demand and utility which are the foundations of the modern economic theory. Before Khaldun and Plato presented the account of specialization and division of labor, the ancient Egyptians used specialization to save time and to increase production. Aristotle proposed the definition of economics through consideration of the use of money in the analysis of exchange. Plato and Aristotle have both influenced economics considerably. Plato’s division of labor was a fundamental concept in Adam smith’s study “the wealth of nations” where he greatly influenced industrial revolution through seeking and rewarding labor specialization which became recognized and accepted by economists and political scientists. Aristotle is considered different from others as he tries to analyze some of the economic problems and phenomena of his era. He criticized the ideas that call for the abolition of private property and the establishment of a collective system because the collective system leads to disputes contributing to the system collapse. Thus, Aristotle prefers private property since it allows for very individual to develop its ownership, increasing production. Aristotle differentiates between the two types of value which are use value and exchange value. Foot-wear (boot) has Use Value as a result of the process of wearing them and Exchange Value representing what we get from the commodities in the market as a result of the exchange of the boot for other Goods. He also explained the subject of money and said it comes from barter trade where there wasn't standard medium of exchange and hence led to difficulties in the trade. Aristotle has a great impact on the philosophy of economics and is applauded by Ricardo as the first philosopher who attempted to tackle economic issues that affected the people providing a human and social environment for economic activities. Philosopher Meikles also considers Aristotle one of the greatest contributors to economics through the theory of money which influences other people beliefs such as in the utility theory, mathematical economics, and neoclassical economics. Ibn Khaldun & Aristotle Khaldun and Aristotle both lived in similar social and political conditions reflected on their views on a range of matters. They were critical for the call to separate economics from Ethics\religion and politics. Khaldun through his idea about the benefits of division of labor outlines that, “the greater the social togetherness and unity, the more successful division will be and the greater the economic growth and prosperity” (Khaldun, 1989. He went on to say that population growth, human capital development, and technological developments have a great effect on economic development. If there is increased human capital development, and advancement in technology, there is increased development both economically and socially. Population growth, therefore, has a direct relationship with wealth. He later introduced the concept of Khaldun-Laffer Curve which establishes the relationship between taxes and revenues, where revenues increase as tax rate increase for some time, but then the increase in tax rates begin to lead to a decrease in revenue amounts. As the taxes increase, the cost of producing products for the manufacturers in the economy also increase Aristotle’s politics was mainly concerned with the analysis of various forms of state governance from constitutional government, democracy, monarchy, aristocracy and tyranny. He greatly criticized the governance of kings. He suggested that property should be owned privately by the people instead of the government where everyone has a share and a distinct interest in his property, where individuals will not complain about each other but will make progress because everyone will be attending to his own business. Allocation of resources was a moral issue to Aristotle who viewed that consumption was the main goal of production, and the surplus should be allocated to bringing up children. In transactions, he uses unnatural and natural labels where natural transactions were related to the satisfaction of needs and wants, and resulted in wealth that was limited due to the purpose it served. Natural transactions on the other end were aimed at making profits and the wealth yielded was without limits. Ibn Khaldun agrees with Aristotle on the ethics, but the source of his motive is Islamic law. Islam forbids charging of interest because it views it as exploitation. As for the allegations of Aristotle being a major source for Ibn Khaldun on both interest and monopoly, it is not held by the similarity of their views because of their different sources. The Interest concept from an economic perspective is based on the changing value of money over time. Indeed, Aristotle and Ibn Khaldun were different on their view about money. Both agree on money being medium of exchange but disagree on money being a store of value. The Population theory The theories about population size and the changes in population are an important subject since long ago. Many of the ancient philosophers and economists such as Confucius, Kautilya, Plato and modern philosophers like Adam Smith, David Richard, and others have contributed greatly both directly and indirectly to the subject of the population through their writings. For example, Kautilya argues that a large population is a source of political wealth, economic and military strength to a country because it will provide a large labor supply for activities which will grow the economy and provide military men who will serve the nation. To explore the issue of the population, we consider the works of sociologist Ibn Khaldun, economist Thomas Malthus, and Aristotle. Ibn Khaldun considered that the increase in population is positive for economic growth as it will lead to increased demand for goods and services and thus create jobs to meet the needs of the rise in population (Khaldun, 1989). When the city is full of people, organized and the available labor increases, individuals will earn and have money for the necessities and the surplus is spent on luxuries.” He goes ahead to support his view by comparing the Bedouin civilizations and a more complicate civilization saying “A Bedouin civilization needs only the simple crafts which are carried out by the people, especially those used for the necessities, they are to serve in view of the demands made by luxury and wealth, then correspond to the civilization of a given country imperial power. Thomas Robert Malthus is however, the major contributor and key figure to the analysis of the population theory. Through his essay the principle of population, Malthus argues that because of the strong forces of attraction between two sexes that are males and females, the population can increase rapidly in multiples leading to a double increase after every 25 years. The population would increase and grow so large that the food production would be insufficient to feed the whole population. The human capacity for reproduction would also be more than the rate at which subsistence food production can be increased from the land. He writes that the population when not checked increases in a geometric ratio while subsistence food production increases in an arithmetic ratio. He contends that the world’s population is growing rapidly more than the available food supply to feed the population. “Since the food supply increases in an arithmetic progression that is 1,2,3,4……and the population increased rapidly in a geometric progression that is 1,2,4,8…….eventually, there would be no food for the people to eat if the population is unchecked” (Malthus, 1809). The gap between food supply and the population will continue to grow over time and although the food supply will increase it would still be insufficient to meet the wants and needs of the population. Famine and other natural calamities such as earthquakes and disease outbreaks increase the death rate which is nature’s way of checking against the increased population growth. In summary, Malthus suggests that “population is limited by means of food production. It increases where means of subsistence is increased unless it is prevented or checked by some phenomena. “The passion between sexes in that which leads to people marrying at a relatively younger age resulting in increased numbers of births causing the population to double itself in every few years if unchecked by misery and vice” (Malthus, 1809). He describes two categories of checks that ensure the population is kept down. The first one is positive means which includes famine or hunger, diseases, and war. The second means are unnatural ways which are taught to the people such as birth control which would decrease the birth rate, late marriages, moral restraint, and abstinence. Without these artificial restraints, the world would face hunger and poverty due to the increased population growth which is not proportional to the food production dependent exclusively on government assistance which cannot be guaranteed for unlimited time. Malthus believed that despite these population checks, the inability to increase food production and supply to keep the population increase at par always results in some situation of overpopulation. Malthus and Ibn Khaldun differ on their approach to the issue of overpopulation due to the Islamic traditions that encourage marrying of many wives and having many children which contrast Malthus approach of abstinence and birth control to check on the population. The factor of population surplus isn’t considered a problem in the Islamic culture because of its Bedouin background. Due to the harsh desert environment, overpopulation element is a source of Power and influence. The limited resources in this nomadic environment didn’t push the tribes to reduce the number of births, but quite the opposite. Free markets theory According to Adam Smith, Free markets exist where there is no monopoly in the production and selling of goods and services, and the market is free of entry by all interested parties. He suggests that in a free market the price of products are determined by the supply and demand forces in the market where if products are in less supply and high demand, their prices are increased and vice Versa (Schotter, 1985). Smith argues that by giving everyone the freedom to produce and sell goods in the market as they want, and opening up the domestic market for international traders, there is increased competition which promotes prosperity and leads to economic growth compared to stringent government regulations. Adam Smith believes in the existence of a "hidden hand" that leads the individual and drives him to make an effort to maximize wealth and achieve prosperity for him and his family (Smith, 2005). When consumers and producers engage in commerce in the marketplace, this is known as a free market trade which is the automatic pricing and distribution mechanisms in the market referred to as the invisible hand by Adam Smith. Smith’s insights into the idea of invisible hand are one of the most important theories in the history of economics and the justification for the free market ideologies thus making Adam Smith the founding father of economics. Smith suggests that production and distribution of commodities should be owned privately by individuals without government intervention and this will result in flourishment of the society. Macroeconomic forces of demand and supply, buying, and selling, profit and loss occur independently until government policies and regulations come into place and override them (Malthus, 1970). Smith's idea is that people should practice hard work and control their success where the government should not interfere. The labor theory of value Labour theory of value was an attempt by economists to find out why commodities were exchanged for various prices in the marketplace. It describes that the price of a commodity could be measured by the number of labor hours used to produce the product. Any products made can be used in different ways. This is how commodities find themselves in the market instead of being used to serve their purpose to the person who made them directly. For everything which we possess there are two uses: both belong to the thing as such, but not in the same manner, for one is the direct use, and the other the indirect or secondary use. Aristotle's point of view was that money had emerged to overcome barter trade difficulties, and the fist money was minted from iron or silver. Later, monetary units dominated the exchange process, which is the basis of barter trade. This led to the emergence of trade, the art of making money, which Aristotle condemned and considered a bad vice because it is beyond natural activity. This theory was advocated for by economist and philosophers Adam Smith, David Ricardo and Karl Marx. Economic thinkers were amazed by the way price of commodities were determined in the marketplace, such that some commodities were sold at higher prices than others and vice versa. For example, “if a horse was sold for 20 pieces of gold, and a pair of shoes was traded at 2 pieces of gold, what made the horse cost ten times the cost of the pair of shoe”, (Cohen, 1979) yet there was no clear way of measuring their value in the market. The labor theory of value suggests that the horse took ten times average labor hours compared to the shoes and therefore this made the horse cost ten times the cost of the pair of shoes. Adam Smith believed that if two products were sold at the same price, then they had used the same average number of labor hours and hence had the same value (Cohen, 1979). Karl Marx used this labour theory of value to criticise the free market economic perspective of Adam Smith by saying that “if all goods and services in a capitalist system are sold at prices that reflect their true value and all their value are measured in labour hours, how can the capitalist even make any profits from the sale”. He goes on to suggest that this can only occur if they remunerate their workers less than the real value of their labor hence they underpay them. “There was little bargaining between the servants and the master expect when conditions became intolerable. This was no more of a labor market that is provided by interns in a hospital” (Heilbroner, 2011). Ibn Khaldun Ibn Khaldun through his books Al-Muqaddima which means the introduction of history addresses the issue of economic growth through reflecting on the economy, sociology and material aspect of civilization. He laid down the stepping stone of different fields of knowledge specifically the science of civilization and is considered the father of economics although this title is given to Adam Smith to his great contribution as well. Before Khaldun, Plato presented the idea of specialization and division of labor, which was used by the ancient Egyptians in the era of the eighteenth dynasty so as to save time and increase hourly produce (Manning and Morris, 2007). Aristotle later introduced the concept of money in his analysis of exchange in the market where he presents the example a pair of shoe for wear which serves a different purpose where it can be worn and be used as a means of exchange for money. Ibn Khaldun recognized these ideas including the one relating to religious and moral perceptions. He voiced his ideas on the issue of the population by following Islamic religion view of population and supports the population increase. He criticizes the ideas that population should be checked by natural and unnatural ways so that the food production available can sustain the human life. He argues that population should increase and only God provides for his people. He also developed the theory of taxation which has affected modern economic thought and even economic policies in places such as the United Kingdom and the United States. Adam Smith Adam Smith is renowned as the father of economics through his contributions to economic theory and policies. He proposed the idea of the invisible hand which is the tendency of free markets where the government only provide the basic infrastructure to facilitate trade and does not regulate the price of commodities. The markets are regulated by free entry selling and distribution, supply and demand and self-interest. He has also known for his compensating wage differences where dangerous and unwanted job opportunities tend to pay higher pays. Through his book the Wealth of Nations, He explains the pricing mechanism in the marketplace that leads to some commodities being priced higher than others. He demonstrated that the work or average labor hours need for the production of a commodity defines the value of the commodity, therefore, causing the variation in the measure of exchange for different products. For example “the time needed to catch an animal. If hunting for a particular animal requires two hours of work, and another animal one hour, two animals who had been caught within one hour should be exchanged for one animal that took two hours” (Stirati, 1994). Even at a certain stage in primitive societies, the swap by the value of work to obtain certain goods was the only criterion for barter. He wrote in “The Wealth of Nation” that “In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects, seems to be the only circumstance which can afford any rule for exchanging them for one another." If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. “It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day's or one hour's labour." The ideas developed by Smith not only became the foundation of the classical school of economics but also earned him the title “The father of economics” and his ideas such as the invisible hand and the theory labour of value became the basis for inquiry into modern economics. David Ricardo The difference between Adam Smith and David Ricardo is a reflection of the reality in which they both lived. On one hand, Adam Smith lived in the era of the Industrial Revolution, in particular with the writing of his most famous author, "The Wealth of Nations," whose interests were focused on problems related to production. On the other hand, David Ricardo lived in a turbulent period because of the conflicts between workers and capitalists and between capitalists and Landlords, where he focused on the problem of distribution of income in the national economy. Ricardo’s analysis is rooted in the labor theory of value where he maintains that the economy moves towards a stand still. He believes that the rate of profit for society depends on the amount of labor that is needed to support the workers at the farm. The most fertile land produces more and quality food than the less fertile land, and therefore it requires more rent. The poorer land used for production requires little rent but all its produce is sold, and the proceeds used to cover the production costs of labor and capital, (Stirati, 1994). As population increases, infertile land must be cultivated to produce food to meet the increasing demand. This, in turn, leads to rising in rent for the good fertile land. Ricardo also based his ideas on the issue of demand and scarcity where the difference between the value of the use and the value of exchange of the commodity relies on the concept of scarcity. Some commodities such as water have a high utilization value, but their exchange value is low due to abundance, while others have low utilization value and high exchange value due to scarcity. Ironically, although Ricardo’s ideas helped provide a basis for the critiques of Karl Max capitalism system, his policies like those of Thomas Malthus are based on the doctrine of free trade. He believed that the laws specifically the Corn Laws were a burden to the agricultural economy. This is because the trade barriers made food prices high and encouraged an increase in land rent rates. “Ricardo therefore actively campaigned against such laws in parliament, corruption and catholic persecution and instead strongly supporting freedom of speech and assembly (Heilbroner, 2011). He argued that the market although not perfect and has its challenges, is best left to the interaction between sellers and buyers, competition, demand and supply. Karl Marx Economist Karl Marx was involved in a different range of subjects, but his approach to economics revolutionized a new way of thinking that is used even in the modern times. He outlines some of the disadvantages that he thought were brought about by capitalism since he considered capitalism a fuel to future revolution. He suggested that “the means of producing commodities would in the end not be held by private industries but by the people or the government” (Marx, 2010). Marx used the labor theory of value which holds that the value of a commodity is determined by the necessary labor time used in the making of the product. He argues that through this model, capitalists do not pay workers the full value of the products they produce but only compensate them for them for the necessary human labor which is the necessary means of subsistence to maintain the workers to work for them. It is only a fraction of a full working day; the capitalists take the rest of the compensation. Marx has sufficient awareness of the role that goods play concerning both usage and exchange. According to Marx, the difference in commodity standards is due to the difference in the materials used. The utility of each commodity create its value of use, but this benefit is conditional on the physical nature of that commodity. Conclusion The history of economics deals with All the above thinkers through their theories that transform the ancient world to present-day. Aristotle focuses on the ideas of how wealth is acquired and questioned whether property or wealth is best in the hands of individuals or the public. Thomas argues that it was the obligation of the people business models of demand and supply, competition and the people interests to determine prices of goods and ensure there’s a just price without government interference. Khaldun expresses his theory of civilization of the people through specialization of labor and the value of money as a means of exchange rather than barter trade. He also criticizes taxes citing they discouraged production and lead to reduced revenues. Smith and Ricardo advocate for a system of natural liberty where individual’s effort is the determinant of output and prices are a real representative of the value of goods and services. All this ancient economics, therefore, play a great role in the revolution of economics presently. Read More