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POVERTY AND

INEQUALITY
CLASSICAL LIBERALS

MERVE DOANER
SNEM SONUGR
OUTLINE
I. Introduction
II. Explanation of Inequality
a. Individual Productivity
b. Individual Preferences
c. Technology
d. Government Intervention
III. Arguments for Inequality
a. Freedom
b. Justice
c. Efficiency
IV.Responses to Poverty
V. Conclusion
Introduction
In the nineteenth century, the
concentration of wealth and power led to
public hostility toward big business, paving
the way for increased regulation of the
economy.
In the early twentieth century, Congress
legislated progressive income and
inheritance taxes.
After the Great Depression, even stronger
efforts were made to address the problems
of poverty and inequality.
I. Explanations of Inequality
Classical Liberals offer the following
explanations of inequality:
a. Individual Productivity
In the late nineteenth century, John Bates
Clark
developed the marginal productivity theory.
John Bates Clark
American neoclassical economist
One of the pioneers of marginalist
relovution
Opponent to institutionalist school of
economics
The Philosophy of Wealth (1866)
MarginalProductivity Theory: Income distribution
to demonstrate that a perfectly competitive
market rewards each factor of production in
accordance with its contribution to output.

Law of Diminishing Returns: It assures a


declining marginal product for every factor, so
there is a specific level of utilitization of both
labor and capital at which remuneration is equal
to the value of marginal product.

Neo classical economist have developd concept


of human capital.
II. Individual Preferences
Although Classical Liberals acknowledge
that differences in abilities and preferences
may be genetically determined, they prefer
to emphasize individuals freedom to shape
their own destiny.
Adam Smith
Pioneer of political economy
Theory of Moral Sentiments (1759)
Wealth of Nations (1776)
Laissez fair economy
A philosopher and a
common street porter
Classical Liberals focus on the role of
individual choice in determining the
distribution of income.

People who invest in themselves through


education and training will increase their
earning capacity, while those who prefer
leisure will fall behind.

Poverty becomes a matter of individual choice.

Inthe terminology of neoclassical economist,


these people have a short time horizon.

Classical Liberals portray inequality as rising


largely from individual choice.
Robert Nozick
from each as he
chooses, to each as
he is chosen
Anarchy, State
and Utopia (1974)
Inequality is
result of individual
choice.
III. Technology
. Classical Liberals attribute much of
current gap between rich and poor to
changing technology.
. Technology concentrates the rewards of
certain occupations among fewer people.
. winner-take-all economy is result of
technological change.
IV. Government Intervention
. Classical Liberals acknowledge that
markets are never perfectly competitive.
. Classical Liberals view many market
imperfections as symptoms of
government interference.
. Government enables interest groups to
restrict competition and block the
advancement of less priviliged groups.
. Classical Liberals blame government for
inequality arising from lack of
competition.
III. Arguments for Inequality
a) Freedom
. If individuals are free to choose, inequality will
inevitably areise among persons with different
abilities and preferences.
. Inequality is inextricably linked with freedom.
. Government would have to restrict what Robert
Nozick calls capitalist acts between consenting
adults.
Milton Friedman
American economist, statistician, and writer
Inequality provides a bulwark against
government repression.
a) Justice
. Classical Liberals view inequality
resulting from competitive market
transaction as fair and just.
. Neoclassical ecenomists use the term
compensating wage differentials to
describe the greater rewards for jobs.
. Milton Friedman claims that a market
society is fair.
.
Friedrich Hayek
an Austrian, later British, economist and
philosopher
Influenced by Milton Friedman

best known for his defense of


classical liberalism.
Ethical arguments about the justice of the
market are futile.
Classical Liberals efforts the claim fairness
for rewards based on productivity.
Since the pattern of ownership of economic
resources affects supply and demand, the
distribution of income is dependent on the
distribution of wealth.
If, as Robert Nozick acknowlde coercion
and theft have affected past accumulations
of wealth, then the market-determined
distribution of income cannot be fair since
it reflects these past injustices.
a) Efficiency
. Classical Liberals rely on three distinct
arguments to link inequality with
efficiency.
. First, inequality establishes powerful
incentives for productive behavior.
. Second, inequality generate saving from
which investment is finance.
. Finally, inequality of wealth and income
inevitable results from hierarchy.
IV. Responses to
Poverty
Early Classical Liberal theorists claimed
that poverty was the unfortunate
consequence of human propensity to
over-populate a wold with limited fertile
soil.
Thomas Maltus

Poverty be ignored.
Although some Classical Liberals favored
private charity as a solution to poverty,
they warned that any assistance should
be minimal so as retain incentives to
work.
Classical Liberals to adopt a more activist
stance toward poverty.
Classical Liberals acknowleged a public
responsibility to aid citizens damaged by
misguided government policies.
Conclusion
Hierarchy and privilege cause
inequality. So, Classical Liberals effort to
demolish privilege and hierarchy.

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