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The history of economic thought deals with different thinkers and theories in the field of political economy and economics from the ancient world to the present day. British philosopher Adam Smith is cited by many as the father of modern economics,12 however his ideas built upon a considerable body of work from predecessors in the eighteenth century. They in turn were grappling with ideas received from centuries before and attempting to apply them to a modern setting. In this sense, Smith was an interpreter to his day of ages-old information.
Economics was not considered a separate discipline until the nineteenth century. In his works on politics and ethics, the ancient Greek philosopher Aristotle grappled with the "art" of wealth acquisition and the question of whether property is best left in private or public hands. In medieval times, scholars like Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price. Economic thought evolved from feudalism in the Middle Ages to mercantilist theory in the renaissance, when the prevailing wisdom advocated that trade policy be structured in order to further the national interest. The modern political economy of Adam Smith appeared during the industrial revolution, when technological advancement, global exploration, and material opulence that had previously been unimaginable was becoming a reality. Changes in economic thought have always accompanied changes in the economy, just as changes in economic thought can propel change in economic policy.
Following Adam Smith's Wealth of Nations, classical economists such as David Ricardo and John Stuart Mill examined the ways the landed, capitalist and labouring classes produced and distributed national riches. In London, Karl Marx castigated the capitalist system he saw around him which he thought was exploitative and alienating, before neo-classical economics in a new era sought to erect a positive, mathematical and scientifically grounded field above normative politics. After the wars of the early twentieth century, John Maynard Keynes led a reaction against governmental abstention from economic affairs, advocating interventionist fiscal policy to stimulate economic demand, growth and prosperity. But with a world divided between the capitalist first world, the communist second world, and the poor of the third world, the post-war consensus broke down. Men like Milton Friedman and Friedrich von Hayek caught the imagination of some western leaders, warning of The Road to Serfdom and socialism, focusing their theory on what could be achieved through better monetary policy and deregulation. However, the reaction of governments through the 1980s has been challenged, and development economists like Amartya Sen and information economists like Joseph Stiglitz are bringing new ideas to economic thought in the twenty first century.
Early economic thought
The earliest discussions of economics date back to ancient times (e.g. Chankya's Arthashastra or Xenophon's Oeconomicus). Back then, and until the industrial revolution, economics was not a separate discipline but part of philosophy. In Ancient Athens, a slave based society but also one developing an embryonic model of democracy,3 Plato's book The Republic contained references to specialisation of labour and production. But it was his pupil Aristotle that made some of the most familiar arguments, still in economic discourse today.
Aristotle
Aristotle's Politics (c.a. 350 BC) was mainly concerned to analyse different forms of a state (monarchy, aristocracy, constitutional government; tyranny, oligarchy, democracy) as a critique of Plato's advocacy of a ruling class of "philosopher-kings". In particular for economists, Plato had drawn a blueprint of society on the basis of common ownership of resources. Aristotle viewed this model as an oligarchical anathema. In Politics, Book II, Part V, Aristotle argued,
"Property should be in a certain sense common, but, as a general rule, private; for, when everyone has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attending to his own business... And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state."4
Though Aristotle certainly advocated there be many things held in common, he argued that not everything could be, simply because of the "wickedness of human nature".5 "It is clearly better that property should be private," wrote Aristotle, "but the use of it common; and the special business of the legislator is to create in men this benevolent disposition." In Politics Book I, Aristotle discusses the general nature of households and market exchanges. For him there is a certain "art of acquisition" or "wealth-getting". "Of everything which we possess," writes Aristotle, foreshadowing Karl Marx's theory of use and exchange value, "there are two uses... a shoe is used to wear, and is used for exchange."6 Money itself has the sole purpose of being a medium of exchange, which means on its own "it is worthless... not useful as a means to any of the necessities of life".7 Nevertheless, points out Aristotle, because the "instrument" of money is the same many people are obsessed with the simple accumulation of money. "Wealth-getting" for one's household is "necessary and honourable", while exchange on the retail trade for simple accumulation is "justly censured, for it is dishonourable".8 Aristotle disapproved highly of usury and also cast scorn on making money through monopoly.9 In Nicomachean Ethics (c.a. 350 BC) Aristotle discusses further the use of money as a medium of exchange, and its reflection of the demand for goods and services.10
Middle Ages
Knowledge of western and northern European economic thought in the early middle ages is scarce. The value of money was perceived as metal based, and that supported notions of "just prices" and objective evaluations. The economy itself remained based on a system of feudal land distribution which included the granting of rights to have an income from them (through taxes and duties). The inspiration to develop and discuss more complex theories of economics and money values rose with options to borrow money (on interest rates), with investments in trade (on the speculation of successful trading missions) and with the rise of the modern banking system in northern Italy in the 13th and 14th centuries. Questions Europe had to solve were: Could it be fair to lend money on interest (if the value of money would be the same, when it came to an evaluation of metal in coins). Could it be justified that Jews and a growing banking sector made money simply by trading with money. It remained unclear how a trade of money could work, though it worked practically in win win situations answering needs and yielding profits both to those those who borrowed money and those who offered their services.
Thomas Aquinas (1225-1274) dominated economic thought in medieval Europe, drawing largely on Aristotle's theory. Questions 77 and 78 of his treatise Summa Theologica relate to economic issues, particularly the fairness of a seller dispensing faulty goods and the concept of a just price. Aquinas argued against any form of cheating and recommended compensation always be paid in lieu of good service. Whilst human laws might not impose sanctions for unfair dealing, divine law did. Bearing similarities to the concept of long-run equilibrium, a just price was supposed to be one just sufficient to cover the costs of production, including the maintenance of a worker and his family. He argued it was immoral for sellers to raise their prices simply because buyers were in pressing need for a product.11
Duns Scotus (1265-1308), a Scottish born theologian criticised Aquinas in Sententia (1295).12 Duns Scotus thought it possible to be more precise than Thomas in calculating a just price, emphasising the costs of labour and expenses - though he recognised that the latter might be inflated by exaggeration. Because buyer and seller usually have different ideas of what a just price comprises, he thought an agreed price usually contains a ‘gift' element on either side, an early forerunner to the idea of trade being a "win-win" situation. If people did not benefit from a transaction, in Scotus' view, they would not trade. Scotus defended merchants as performing a necessary and useful social role, transporting goods and making them available to the public.
Mercantilists and nationalism
- See also: Charles Davenant, Josiah Child, James Denham-Steuart, Grotius, and Niccolò Machiavelli
The early modern period witnessed a number of developments that induced a parallel development of economic theories. Feudalism had meant that feudal lords granted rights to exploit regions. Taxes and tributes were the form to share profits hierarchically. Merchant guilds led to the development of stock markets where shareholders would finance individual projects, where risks would be shared, where expectations of profits went into the individual deal.
The discovery of South America brought Gold and Silver into the state households of Spain and Portugal. They did, however, not lead to sustainable economic growth in either country, and this spoke against all theories that money meant wealth and that the richest nation was the one that had most money in its possession. The economic developments of the 17th century turned the Netherlands into the fittest economy, a country that possessed neither a profitable agriculture nor other resources. Theories to explain this had to be created: The simple activity of trading made money, so the result. The Dutch supported this activity using their power at sea to protect their East India Company and the stock market in Amsterdam. The import of goods lead to a rise of factories refining them. Theories how a nation could profit from these observations grew in France under the interest of the crown and in England. Basic assumptions were that the population should sell goods to earn money, and that it should reduce spending money abroad on luxury. The ideal nation bought goods to trade, refine and sell them with profit, not to consume them. Theories to regulate imports and to protect home markets were the result. A positive balance of trade ought to be maintained, with a surplus of exports. They seemed to be supported by conservative Christian morals that called for hard work and an ascetic life.
The early 18th-century saw the next step of the debate with authors like Bernard Mandeville who questioned that consumption and private spendings on luxury were altogether bad. The new theories were built on parallels with body functions: the circulation of money seemed to have a wholesome effect on a country's economy. It lead to private ambition to sustain wealth by working towards it. The state, so the new theory would have to facilitate the circulation of goods, moneys and working power.
Central terms like mercantilism coined in 1763 by Victor de Riqueti, marquis de Mirabeau and popularised by Adam Smith were now designed to look back on theories of the past. A debate of theories began at the same time.
Thomas Mun
English businessman Thomas Mun (1571-1641) represents early mercantile policy in his book England's Treasure by Foraign Trade . Although it was not published until 1663 it was widely circulated as a manuscript before then. He was a member of the East India Company and also wrote about his experiences there in A Discourse of Trade from England unto the East Indies (1621). According to Mun, trade was the only way to increase England’s treasure (i.e., national wealth) and in pursuit of this end he suggested several courses of action. Important were frugal consumption in order to increase the amount of goods available for export, increased utilisation of land and other domestic natural resources to reduce import requirements, lowering of export duties on goods produced domestically from foreign materials, and the export of goods with inelastic demand because more money could be made from higher prices.
Philipp von Hörnigk
Philipp von Hörnigk (1640-1712, sometimes spelt Hornick or Horneck) was born in Frankfurt am Main and became an Austrian civil servant writing in a time when his country was constantly threatened by Ottoman invasion. In Österreich Über Alles, Wenn Sie Nur Will (1684, Austria Over All, If She Only Will) he laid out one of the clearest statements of mercantile policy. He listed nine principal rules of national economy.
"To inspect the country's soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered... All commodities found in a country, which cannot be used in their natural state, should be worked up within the country... Attention should be given to the population, that it may be as large as the country can support... gold and silver once in the country are under no circumstances to be taken out for any purpose... The inhabitants should make every effort to get along with their domestic products... [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares... and should be imported in unfinished form, and worked up within the country... Opportunities should be sought night and day for selling the country's superfluous goods to these foreigners in manufactured form... No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home."
Nationalism, self-sufficiency and national power were the basic policies proposed.13
Jean Baptiste Colbert
Jean Baptiste Colbert (1619-1683) was Minister of Finance under King Louis XIV of France. He set up national guilds to regulate major industries. Silk, linen, tapestry, furniture manufacture and wine were examples of the crafts in which France specialised, all of which came to require membership of a guild to operate in. These remained until the French revolution. According to Colbert, "It is simply, and solely, the abundance of money within a state [which] makes the difference in its grandeur and power."
John Locke
John Locke (1632-1704) was born near Bristol and educated in London and Oxford. He is considered one of the most significant philosophers of his era mainly for his critique of Thomas Hobbes' defence of absolutism and the development of social contract theory in Leviathan (1651). Locke believed that people contracted into society which was bound to protect their rights of property.14 He defined property broadly to include people's lives and liberties, as well as their wealth. When people combined their labour with their surroundings, then that created property rights. In his words from his Second Treatise on Civil Government (1689),
"God hath given the world to men in common... Yet every man has a property in his own person. The labour of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property."15
Locke was arguing that not only should the government cease interference with people's property (or their "lives, liberties and estates") but also that it should positively work to ensure their protection. His views on price and money were laid out in a letter to a Member of Parliament in 1691 entitled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money (1691). Here Locke argued that the "price of any commodity rises or falls, by the proportion of the number of buyers and sellers," a rule which "holds universally in all things that are to be bought and sold."16
Dudley North
Dudley North (1641-1691) was a wealthy merchant and landowner. He worked as an official for the Treasury and was opposed to most mercantile policy. In his Discourses upon trade (1691), which he published anonymously, he argued that the assumption of needing a favourable trade balance was wrong. Trade, he argued, benefits both sides, it promotes specialisation, the division of labour and produces an increase in wealth for everyone. Regulation of trade interfered with these benefits by reducing the flow of wealth.
David Hume
David Hume (1711-1776) agreed with North's philosophy and denounced mercantile assumptions. His contributions were set down in Political Discourses (1752), later consolidated in his Essays, Moral, Political, Literary (1777). Added to the fact that it was undesirable to strive for a favourable balance of trade it is, said Hume, in any case impossible. Hume held that any surplus of exports that might be achieved would be paid for by imports of gold and silver. This would increase the money supply, causing prices to rise. That in turn would cause a decline in exports until the balance with imports is restored.
The circular flow
- See also: Bernard Mandeville, John Law, Pierre le Pesant de Boisguilbert, and Victor de Riqueti
Similarly disenchanted with regulation on trademarks inspired by mercantilism, a Frenchman name Vincent de Gournay (1712-1759) is reputed to have asked why it was so hard to laissez faire, laissez passer (free trade, free enterprise). He was one of the early physiocrats, a word from Greek meaning "government of nature", who held that agriculture was the source of wealth. As historian David B. Danbom wrote, the Physiocrats "damned cities for their artificiality and praised more natural styles of living. They celebrated farmers."17 Over the end of the seventeenth and beginning of the eighteenth century big advances in natural science and anatomy were being made, including the discovery of blood circulation through the human body. This concept was mirrored in the physiocrats' economic theory, with the notion of a circular flow of income throughout the economy.
François Quesnay
François Quesnay (1694-1774) was the court physician to King Louis XV of France. He believed that trade and industry were not sources of wealth, and instead in his book, Tableau économique (1758, Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages and purchases were the real economic movers. Firstly, said Quesnay, regulation impedes the flow of income throughout all social classes and therefore economic development. Secondly, taxes on the productive classes, such as farmers, should be reduced in favour of rises for unproductive classes, such as landowners, since their luxurious way of life distorts the income flow.
Jacques Turgot
Jacques Turgot (1727-1781) was born in Paris and from an old Norman family. His best known work, Réflexions sur la formation et la distribution des richesses (1766, Reflections on the Formation and Distribution of Wealth) developed Quesnay's theory that land is the only source of wealth. Turgot viewed society in terms of three classes: the productive agricultural class, the salaried artisan class (classe stipendice) and the landowning class (classe disponible). He argued that only the net product of land should be taxed and advocated the complete freedom of commerce and industry. In August 1774, Turgot was appointed to be Minister of Finance and in the space of two years introduced many anti-mercantile and anti-feudal measures supported by the King. A statement of his guiding principles, given to the King were "no bankruptcy, no tax increases, no borrowing." Turgot's ultimate wish was to have a single tax on land and abolish all other indirect taxes, but measures he introduced before that were met with overwhelming opposition from landed interests. Two edicts in particular, one suppressing corvées (charges from farmers to aristocrats) and another renouncing privileges given to guilds inflamed influential opinion. He was forced from office in 1776.
The Wealth of Nations
- See also: Industrial revolution and Anders Chydenius
Adam Smith (1723-1790) is popularly seen as the father of modern political economy. His publication of the An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776 happened to coincide not only with the American Revolution, shortly before the Europe wide upheavals of the French Revolution, but also the dawn of a new industrial revolution that allowed more wealth to be created on a larger scale than ever before. Smith was a Scottish moral philosopher, whose first break was The Theory of Moral Sentiments (1759). He argued in this that people's ethical systems develop through personal relations with other individuals, that right and wrong are sensed through others' reactions to one's behaviour. This gained Smith more popularity than his next work, The Wealth of Nations, which the general public initially ignored.18 Yet Smith's political economic magnum opus was successful in circles that mattered.
Context
William Pitt, the Tory Prime Minister in the late 1780s based his tax proposals on Smith's ideas and advocated free trade as a devout disciple of The Wealth of Nations.19 Smith was appointed a commissioner of customs and within twenty years Smith had a following of new generation writers who were intent on building the science of political economy.20
Smith expressed an affinity himself to the opinions of Edmund Burke, known widely as a political philosopher, a Member of Parliament.
"Burke is the only man I ever knew who thinks on economic subjects exactly as I do without any previous communication having passed between us".21
Burke was an established political economist himself, with his book Thoughts and Details on Scarcity. He was widely critical of liberal politics, and condemned the French Revolution which began in 1789. In Reflections on the Revolution in France (1790) he wrote that the "age of chivalry is dead, that of sophisters, economists and calculators has succeeded, and the glory of Europe is extinguished forever." Smith's contemporary influences included Francois Quesnay and Jacques Turgot who he met on a stay in Paris, and David Hume, his Scottish compatriot. The times produced a common need among thinkers to explain social upheavals of the Industrial revolution taking place, and in the seeming chaos without the feudal and monarchical structures of Europe, show there was order still.
The invisible hand
| "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."22 |
| Adam Smith's famous statement on self interest |
Smith argued for a "system of natural liberty"23 where individual effort was the producer of social good. Smith believed even the selfish within society were kept under restraint and worked for the good of all when acting in a competitive market. Prices are often unrepresentative of the true value of goods and services. Following John Locke Smith thought true value of things derived from the amount of labour invested in them.
"Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it."24
When the butchers, the brewers and the bakers acted under the restraint of an open market economy, their pursuit of self interest, thought Smith, paradoxically drives the process to correct real life prices to their just values. His classic statement on competition goes as follows.
"When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither... The market price will sink..."25
Smith believed that a market produced what he dubbed the "progress of opulence". This involved a chain of concepts, that the division of labour is the driver of economic efficiency, yet it is limited to the widening process of markets. Both labour division and market widening requires more intensive accumulation of capital by the entrepreneurs and leaders of business and industry. The whole system is underpinned by maintaining the security of property rights.
Limitations
Smith's vision of a free market economy, based on secure property, capital accumulation, widening markets and a division of labour contrasted with the mercantilist tendency to attempt to "regulate all evil human actions."26 Smith believed there were precisely three legitimate functions of government. The first function was...
"...erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain... Every system which endeavours... to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it... retards, instead of accelerating, the progress of the society toward real wealth and greatness."
In addition to the necessity of public leadership in certain sectors Smith argued, secondly, that cartels were bad because of their potential to limit production and quality of goods and services.27 Thirdly, Smith criticised government support of any kind of monopoly which always charges the highest price "which can be squeezed out of the buyers"28 However, in both cases, Smith believed it was governments' encouragement of monopolies that needed to end, rather than the need for active intervention to prevent them. The existence of monopoly and the potential for cartels, which would later form the core of competition law policy, could distort the benefits of free markets to the advantage of businesses at the expense of consumer sovereignty.
Classical political economy
- See also: Thomas Edward Cliffe Leslie, Walter Bagehot, and Thorold Rogers
The classical economists were referred to as a group for the first time by Karl Marx29, who admired their scientific rigor. One unifying part of their theories was the labour theory of value, contrasting to value deriving from a general equilibrium of supply and demand. Theses economists have seen the first economic and social transformation brought by the Industrial Revolution: rural depopulation, precariousness, poverty, apparition of a working class. They wonder about the population growth, because the demographic transition had began in Great Britain at that time. They also asked many fundamental questions, about the source of value, the causes of economic growth and the role of money in the economy. They supported a free-market economy, arguing it was a natural system based upon freedom and property. However, these economists were divided and did not make up a unified current of thought.
Jeremy Bentham
Jeremy Bentham (1748-1832) was perhaps the most radical thinker of his time, and developed the concept of utilitarianism. Bentham was an atheist, a prison reformer, animal rights activist, believer in universal suffrage, free speech, free trade and health insurance at a time when few dared to argue for any. He was schooled rigorously from an early age, finishing university and being called to the bar at 18. His first book, Fragment of Government (1776) published anonymously was a trenchant critique of William Blackstone's Commentaries of the laws of England. This gained wide success until it was found that the young Bentham, and not a revered Professor had penned it. In The Principles of Morals and Legislation (1791) Bentham set out his theory of utility.
"Nature has placed mankind under the governance of two sovereign masters, pain and pleasure... On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne... In words a man may pretend to abjure their empire: but in reality he will remain subject to it all the while. The principle of utility recognizes this subjection, and assumes it for the foundation of that system, the object of which is to rear the fabric of felicity by the hands of reason and of law."30
The aim of legal policy must be to decrease misery and suffering so far as possible while producing the greatest happiness for the greatest number.31 Bentham even designed a comprehensive methodology for the calculation of aggregate happiness in society that a particular law produced, a felicific calculus.32 Society, argued Bentham, is nothing more than the total of individuals,33 so that if one aims to produce net social good then one need only to ensure that more pleasure is experienced across the board than pain, regardless of numbers. For example, a law is proposed to make every bus in the city wheel chair accessible, but slower moving as a result than its predecessors because of the new design. Millions of bus users will therefore experience a small amount of displeasure (or "pain") in increased traffic and journey times, but a minority of people using wheel chairs will experience a huge amount of pleasure at being able to catch public transport, which outweighs the aggregate displeasure of other users. Interpersonal comparisons of utility were allowed by Bentham, the idea that one person's vast pleasure can count more than many others' pain. Much criticism later showed how this could be twisted, for instance, would the felicific calculus allow a vastly happy dictator to outweigh the dredging misery of his exploited populace? Despite Bentham's methodology there were severe obstacles in measuring people's happiness.
Jean-Baptiste Say
Jean-Baptiste Say (1767-1832) was a Frenchman, born in Lyon who helped to popularise Adam Smith's work in France.34 His book, A Treatise on Political Economy (1803) contained a brief passage, which later became orthodoxy in political economics until the Great Depression and known as Say's Law of markets. Say argued that there could never be a general deficiency of demand or a general glut of commodities in the whole economy. People produces things, said Say, to fulfill their own wants, rather than those of others. Production is therefore not a question of supply, but an indication of producers demanding goods. Say agreed that a part of the income is saved by the households, but in the long term, savings are invested. Investment and consumption are the two elements of demand, so that production is demand, so it is impossible for production to outrun demand, or for there to be a "general glut" of supply. Say also argued that money was neutral, because its sole role is to facilitate exchanges: therefore, people demand money only to buy commodities. Say said that "money is a veil". To sum up these two ideas, Say said "products are exchanged for products". At most, there will be different economic sectors whose demands are not fulfilled. But over time supplies will shift, businesses will retool for different production and the market will correct itself. An example of a "general glut" could be unemployment, in other words, too great a supply of workers, and too few jobs. Say's Law advocates would suggest that this necessarily means there is an excess demand for other products that will correct itself. This remained a foundation of economic theory until the 1930s. Say's Law was first put forward by James Mill (1773-1836) in English, and was advocated by David Ricardo, Henry Thornton35 and John Stuart Mill. However two political economists, Thomas Malthus and Sismondi, were unconvinced.
Thomas Malthus
Thomas Malthus (1766-1834) was a Tory minister in the United Kingdom Parliament who, contrasting to Bentham, believed in strict government abstention from social ills. Malthus devoted the last chapter of his book Principles of Political Economy (1820) to rebutting Say's law, and argued that the economy could stagnate with a lack of "effectual demand". In other words, wages if less than the total costs of production cannot purchase the total output of industry and that this would cause prices to fall. Price falls cause incentives to invest, and the spiral could continue indefinitely. Malthus is more notorious however for his earlier work, An Essay on the Principle of Population. This argued that intervention was impossible because of two factors. "Food is necessary to the existence of man," wrote Malthus. "The passion between the sexes is necessary and will remain nearly in its present state," he added, meaning that the "power of the population is infinitely greater than the power in the Earth to produce subsistence for man." Nevertheless growth in population is checked by "misery and vice". Any increase in wages for the masses would cause only a temporary growth in population, which given the constraints in the supply of the Earth's produce would lead to misery, vice and a corresponding readjustment to the original population. However more labour could mean more economic growth, either one of which was able to be produced by an accumulation of capital.
David Ricardo
David Ricardo (1772-1823) was born in London. By the age of 26, he had become a wealthy stock market trader and bought himself a constituency seat in Ireland to gain a platform in the British parliament's House of Commons. Ricardo's best known work is his Principles of Political Economy and Taxation, which contains his critique of barriers to international trade and a description of the manner the income is distributed in the population. Ricardo made a distinction between the workers, who received a wage fixed to a level at which they can survive, the landowners, who earn a rent, and capitalists, who own capital and receive a profit, a residual part of the income. If population grows, it becomes necessary to cultivate additional land, whose fertility is lower than that of already cultivated fields, because of the law of decreasing productivity. Therefore, the cost of the production of the wheat increases, as well as the price of the wheat: The rents increase also, the wages, indexed to inflation (because they must allow workers to survive) too. Profits decrease, until the capitalists can no longer invest. the economy, Ricardo concluded, is bound to tend towards a steady state.
To postpone the steady state, Ricardo advocates to promote international trade to import wheat at a low price to fight landowners. The Corn Laws of the UK had been passed in 1815, setting a fluctuating system of tariffs to stabilise the price of wheat in the domestic market. Ricardo argued that raising tariffs, despite being intended to benefit the incomes of farmers, would merely produce a rise in the prices of rents that went into the pockets of landowners. Furthermore, extra labour would be employed leading to an increase in the cost of wages across the board, and therefore reducing exports and profits coming from overseas business. Economics for Ricardo was all about the relationship between the three "factors of production": land, labour and capital. Ricardo demonstrated mathematically that the gains from trade would outweigh the perceived advantages of protectionist policy. The law of comparative advantage suggests that even if one country is inferior at producing all of its goods than another, it may still benefit from opening its borders since the inflow of good produced more cheaply than at home produces a gain for domestic consumers. Say that in one day in England an average worker produces a bushel of wheat and in two days a yard of cloth, while the average French worker can do either in just a day. If England swaps the wheat it produces (one day's production) for French cloth (while English cloth takes two days) then both sides can strike a bargain between the margin that is mutually beneficial. England by selling its wheat can get its cloth in a day, rather than two days, and France can get an extra bushel of wheat for selling its more efficiently produced cloth. This would lead to a shift in prices so that eventually England would be producing goods in which its comparative advantages were the highest.
John Stuart Mill
John Stuart Mill (1806-1873) was the dominant figure of political economic thought of his time, as well as being a Member of Parliament for the seat of Westminster, and a leading political philosopher. Mill was a child prodigy, reading Ancient Greek from the age of 3, and being vigorously schooled by his father James Mill. Jeremy Bentham was a close mentor and family friend, and Mill was heavily influenced by David Ricardo. Mill's textbook, first published in 1848 and titled Principles of Political Economy was essentially a summary of the economic wisdom of the mid nineteenth century.36 It was used as the standard texts by most universities well into the beginning of the twentieth century. On the question of economic growth Mill tried to find a middle ground between Adam Smith's view of ever expanding opportunities for trade and technological innovation and Thomas Malthus' view of the inherent limits of population. In his fourth book Mill set out a number of possible future outcomes, rather than predicting one in particular. The first followed the Malthusian line that population grew quicker than supplies, leading to falling wages and rising profits. The second, per Smith, said if capital accumulated faster than population grew then real wages would rise. Third, echoing David Ricardo, should capital accumulate and population increase at the same rate, yet technology stay stable, there would be no change in real wages because supply and demand for labour would be the same. However growing populations would require more land use, increasing food production costs and therefore decreasing profits. The fourth alternative was that technology advanced faster than population and capital stock increased. The result would be a prospering economy. Mill felt the third scenario most likely, and he assumed technology advanced would have to end at some point.37 But on the prospect of continuing economic growth, Mill was more ambivalent.
"I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress.38
Mill is also credited with being the first person to speak of supply and demand as a relationship rather than mere quantities of goods on markets,39 the concept of opportunity cost and the rejection of the wage fund doctrine.40
Marxism
Just as the term "mercantilism" had been coined and popularised by its critics, like Adam Smith, so was the term "capitalism" or Kapitalismus used by its dissidents, primarily Karl Marx. Karl Marx (1818-1883) was, and in many ways still remains the pre-eminent socialist economist. His combination of political theory represented in the Communist Manifesto and the dialectic theory of history inspired by Friedrich Hegel provided a revolutionary critique of capitalism as he saw it in the nineteenth century. The socialist movement that he joined had emerged in response to the conditions of people in the new industrial era and the classical economics which accompanied it. A political exile from his native Germany, Marx himself had lived until 1855 in the inner-London slum of Soho, before his wife Jenny inherited money enough to move to the north London suburb of Kentish Town, then still in development. He wrote his magnum opus Das Kapital at the British Museum's library.
Context
Movement for reform of the conditions in which working class people lived was present long before either Marx or the notion of capitalism. Saint Thomas More as early as 1516 had used his satire name Utopia to criticise the displacement of the peasantry for sheep rearing of the landed gentry.41 Charles Dickens in the early nineteenth century was becoming popular for books where he had observed and shamed the nineteenth century business ethic in Hard Times, the levels of poverty and crime in Oliver Twist and the institutions of justice in Bleak House. Robert Owen (1771-1858) was one industrialist who determined to improve the conditions of his workers. He bought textile mills in New Lanark, Scotland where he forbade children under ten to work, set the workday from 6 a.m. to 7 p.m. and provided evening schools for children when they finished. Such meagre measures were still substantial improvements and his business remained solvent through higher productivity, though his pay rates were lower than the national average.42 He published his vision in The New View of Society (1816) during the passage of the Factory Acts, but his attempt from 1824 to begin a new utopian community in New Haven, Indiana ended in failure. One of Marx's own influences was the French philosopher Pierre Proudhon, who concluded in his book What is Property? (1840) that property is theft. Compared to the classical Mill, who had written that "partial taxation is a mild form of robbery",43 this strain of thought represented important and radical criticism. Marx had been a friend of Proudhon. But when Proudhon made a political economic attack on the classical "iron law of wages", among other things, in his book The Philosophy of Poverty (1846)44 Marx replied with a cynically titled article, The Poverty of Philosophy.45 Legend has it that they never spoke again.46 That same year the Revolutions of 1848 took place and Marx, along with Friedrich Engels published the Communist Manifesto, calling for the workers of the world to unite and fear the loss of nothing but their chains. Engels himself was a published radical author. He released a book titled The Condition of the Working Class in England in 184447 describing people's positions as "the most unconcealed pinnacle of social misery in our day." Engels himself was heir to a Manchester factory, and though he detested the business,48 used his profits to help finance Marx's work. After Marx died, it was Engels that completed the second volume of Das Kapital from Marx's notes.
Das Kapital
Karl Marx begins Das Kapital with the concept of commodities. Before capitalist societies, says Marx, the mode of production was based on slavery (e.g. in ancient Rome) before moving to feudal serfdom (e.g. in mediaeval Europe). As society has advanced, economic bondage has become looser, but the current nexus of labour exchange has produced an equally erratic and unstable situation allowing the conditions for revolution. People buy and sell their labour in the same way as people buy and sell goods and services. People themselves are disposable commodities. As he wrote in the Communist Manifesto,
"The history of all hitherto existing society is the history of class struggles. Freeman and slave, patrician and plebeian, lord and serf, guildmaster and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another... The modern bourgeois society that has sprouted from the ruins of feudal society has not done away with class antagonisms. It has but established new classes, new conditions of oppression, new forms of struggle in place of the old ones."
And furthermore from the first page of Das Kapital,
"The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,”49 its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.
Marx's use of the word "commodity" is tied into an extensive metaphysical discussion of the nature of material wealth, how the objects of wealth are perceived and how they can be used. The concept of a commodity contrasts to objects of the natural world. When people mix their labour with an object it becomes a "commodity". In the natural world there are trees, diamonds, iron ore and people. In the economic world they become chairs, rings, factories and workers. However, says Marx, commodities have a dual nature, a dual value. He distinguishes the use value of a thing from its exchange value, which can be entirely different.50 The use value of a thing derives from the amount of labour used to produce it, says Marx, following the classical economists in the labour theory of value. However, Marx did not believe labour only was the source of use value in things. He believed value can derive too from natural goods and refined his definition of use value to "socially necessary labour time" (the time people need to produce things when they are not lazy of inefficient).51 Furthermore, people subjectively inflate the value of things, for instance because there's a commodity fetish for glimmering diamonds,52 and oppressive power relations involved in commodity production. These two factors mean exchange values differ greatly. An oppressive power relation, says Marx applying the use/exchange distinction to labour itself, in work-wage bargains derives from the fact that employers pay their workers less in "exchange value" than the workers produce in "use value". The difference makes up the capitalist's profit, or in Marx's terminology, "surplus value".53 Therefore, says Marx, capitalism is a system of exploitation.
Marx's work turned the labour theory of value, as the classicists used it, on its head. His dark irony goes deeper by asking what is the socially necessary labour time for the production of labour (i.e. working people) itself. Marx answers that this is the bare minimum for people to subsist and to reproduce with skills necessary in the economy.54 People are therefore alienated from both the fruits of production and the means to realise their potential, psychologically, by their oppressed position in the labour market. But the tale told alongside exploitation and alienation is one of capital accumulation and economic growth. Employers are constantly under pressure from market competition to drive their workers harder, and at the limits invest in labour displacing technology (e.g. an assembly line packer for a robot). This raises profits and expands growth, but for the sole benefit of those who have private property in these means of production. The working classes meanwhile face progressive immiseration, having had the product of their labour exploited from them, having been alienated from the tools of production. And having been fired from their jobs for machines, they end unemployed. Marx believed that a reserve army of the unemployed would grow and grow, fuelling a downward pressure on wages as desperate people accept work for less. But this would produce a deficit of demand as the people's power to purchase products lagged. There would be a glut in unsold products, production would be cut back, profits decline until capital accumulation halts in an economic depression. When the glut clears, the economy again starts to boom before the next cyclical bust begins. With every boom and bust, with every capitalist crisis, thought Marx, tension and conflict between the increasingly polarised classes of capitalists and workers heightens. Moreover smaller firms are being gobbled by larger ones in every business cycle, as power is concentrated in the hands of the few and away from the many. Ultimately, led by the Communist party, Marx envisaged a revolution and the creation of a classless society. How this may work, Marx never suggested. His primary contribution was not in a blue print for how society would be, but a criticism of what he saw it was.
After Marx
The first volume of Das Kapital was the only one Marx alone published. The second and third volumes were done with the help of Friedrich Engels and Karl Kautsky, who had become a friend of Engels, saw through the publication of volume four. When the World War I and then the Russian Revolution broke out, Kautsky opposed the course of both. He was a member of the Sozialdemokratische Partei Deutschlands and condemned Vladimir Lenin's vision for the Soviet Union. As he wrote in 1934 in Marxism and Bolshevism: Democracy and Dictatorship,
"The Bolsheviks under Lenin’s leadership, however, succeeded in capturing control of the armed forces in Petrograd and later in Moscow and thus laid the foundation for a new dictatorship in place of the old Tsarist dictatorship."55
Marx had begun a tradition of economists who concentrated equally on political affairs. Also in Germany, Rosa Luxembourg was a member of the SPD, who later turned towards the Communist Party because of their stance against the First World War. Beatrice Webb in England was a socialist, who helped found both the London School of Economics (LSE) and the Fabian Soci