Classical economics, concept of value and distribution.

1. 1. CLASSICALTHEORY
OF GROWTH,
DISTRIBUTION AND
VALUE
Prof. Prabha Panth,
Osmania University,
Hyderabad, India

2. CLASSICALTHEORY OF GROWTH,
DISTRIBUTIONANDVALUE
Chief features of Classical System:
1. Capital Accumulation: is the prime mover of the economy,
which sets it into motion. Everything proceeds from it.
2. Aggregate Analysis: Analysed the entire economy, Macro
analysis, tracing the progress of a nation.
3. Heterogeneous goods: are produced in an economy.To
aggregate the heterogenous goods, a common
denominator is needed, to enable them to be added
together.
• Hence theory ofValue is important, to aggregate the
heterogenous goods and services in an economy.06/05/2017 Prabha Panth 2

3. ■ This raises the following questions:
• What is meant byValue?
• How isValue determined?
• What is the unit of measurement ofValue?
• How to ensure that theValue-measure, or unit of
Value remains constant?
■ Value:The concept, measurement, and
depiction of value is one of the most esoteric
and widely debated issue in the theory of
Economics.
06/05/2017 Prabha Panth 3

4. • Value is not the same as Price. Market Price is
determined by supply and demand in the market.
• It can fluctuate widely due to various conditions in the
market.
• Hence Market Price is not a constant measure of value,
for a changing measuring rod cannot give correct value
to goods and services. Inflation and deflation cannot
give a correct value of output produced in an economy.
• Hence an invariant measure of value is required; a
measure that will not change when prices and other
things change in the economy.
• Classicals thought thatValue is determined by the cost
of production, chiefly Labour costs.
06/05/2017 Prabha Panth 4

5. • Value is determined by the Cost of Production.
Value = wages + rent + profit
Wage rate = subsistence wage rate
Rent = MP of land,
But in the case of Profit paid on capital, difficulties arise.
→ For: capital goods are heterogenous, durable, and
produced by labour and other capital inputs, e.g. if corn
is produced by L and K1, then K1 is produced by L and
K2, and so on. K1 and K2 are different capital goods
→ Capital goods take time to be produced. So during that
time period, interest has to be paid on investment.
06/05/2017 Prabha Panth 5

6. → So value of capital includes cost of inputs, wages, cost of
other capital inputs, and interest (paid on Investment). If
these change, then value of capital may also change.
→ Hence value of capital cannot be determined independently
of distribution.
Hence :
Production  output is produced
Output  distributed among various classes, but:
heterogenous goods to be distributed, requires value to
aggregate them,
Value  determined by cost of production, which depends
on distribution. Changes in distribution, may affect value.
06/05/2017 Prabha Panth 6

7. Features of Classical theory, continued:
4. Classes: there are three classes of society – land owners
– who own land, capitalists – supply capital, and
workers – provide labour.
5. Distribution: How should the total output be shared by
these three classes?
6. Diminishing Returns: All factors are subject to
diminishing returns.
7. Stationary State: As capital accumulates, economic
growth takes place. But diminishing returns, and rising
wage and rents, reduce profits and hence investment,
ultimately leads to a Stationary State.
06/05/2017 Prabha Panth 7