Transcript The Classical School - College of Business and Economics

The British “Classicals”
History of Economic Thought
Boise State University
Fall 2015
Prof. D. Allen Dalton
Who are the “Classicals”?
• The Notion of the “Classical School”
– Karl Marx
– Alfred Marshall
– J.M. Keynes
• The Legacy of Adam Smith
– labor/cost-of-production theory of value
– focus on economic growth
– presumption in favor of limited government
• Analytical perspective of “Classical” political
economy
Who are the “Classicals”?
• British “Schools” during the “Classical”
Period
– The Ricardians
– The Oxford-Dublin School
– The Manchester “School”
– Ricardian Socialists
• Controversies during the “Classical” Period
– The Buillionist Controversy
– The Corn Law Controversy
– The General Glut Controversy
– The Banking-Currency School Debate
Historical Background
• Napoleonic Wars
– during wars, joint blockade shuts off importation
of corn into Britain
– rising corn prices and rising land rents
– extension of cultivation and increase in pace of
enclosure of commons
– suspension of specie payments by Bank of
England and country banks
– rapid expansion of note issue and monetization of
government debt by Bank of England
• Increasing Industrialization
• Rising Evangelicalism
Jeremy Bentham (1748-1832)
• independently wealthy; trained as
lawyer at Queen’s College, Oxford
• Defense of Usury (1787)
– critique of Smith’s views on maximum
interest legislation
• Introduction to the Principles of Morals
(1789)
– founding document of British utilitarianism
– “greatest happiness for greatest number”
– obligations of the State
• prevention of suffering (subsistence
level of income and security of private
property)
• encourage abundance of wealth and
population
• equality of means (diminishing marginal
utility of income)
David Ricardo (1772-1823)
• Iberian Jewish descent; family fled
Holland during Spanish persecutions
of early 1700s
• Orthodox stockbroker father; trained to
business
• marries Quaker wife at age 21 (1793),
breaks with family, sets up own
business in government securities
• 1814, retires from business (wealth est.
£750,000)
• 1819, elected MP, Irish borough
• High Price of Bullion (1810)
– argues Buillionist position
– suggests impossibility of “general gluts”
David Ricardo (1772-1823)
• An Essay on the Influence of a Low Price of
Corn on the Profits of Stock (1815)
– independent discovery of differential rent theory
– statement of law of diminishing returns to agriculture
– one-commodity (corn economy) model
• On the Principles of Political Economy and
Taxation (1817, 19, 21)
– labor embodied theory of value - “93% labor theory of
value”
– comparative advantage theory of international trade
• Notes on Malthus (1820)
– rejects Malthus’ arguments concerning general gluts and
affirms Say’s Law of Markets
The Ricardians
• James Mill (1773-1836)
– An Essay on the Impolicy of
a Bounty on Grain (1804)
– Commerce Defended (1808)
• attack against Cobbett and Spence (land as source of wealth,
foreign trade causes loss, public debt not a burden, taxes are
productive, crises caused by oversupply)
– Meets and befriends Bentham and Ricardo
– becomes cadre leader of Philosophic Radicals
• combination of Benthamite utilitarianism and radical Smithian
free-trade
– Elements of Political Economy (1821)
• Wages-fund doctrine (ratio of capital to population
determines wage rate)
The Ricardians
• Thomas de Quincey (1785-1859)
–
–
–
–
–
born to Manchester textile merchants
student at Worcester College, Oxford
writer and literary critic
Confessions of an English Opium Eater (1821)
eloquent defender of Ricardian doctrines
• “The Services of Mr. Ricardo to the Science of Political
Economy,” London Magazine, 1824
• Dialogues of the Three Templars on Political Economy,”
London Magazine, 1824
– The Logic of Political Economy (1844)
The Ricardians
• John Ramsay McCulloch (1789-1864)
– Scottish journalist
– editor of Edinburgh Review (Whig)
• repeal Corn Laws, retain Poor Laws, legalize trade
unions
– A Discourse on the Rise, Progress, Peculiar
Objects and Importance of Political Economy
(1824)
• emphasis on wages-fund doctrine
– The Principles of Political Economy (1825)
• first successful serious “textbook” in economics
– A Descriptive and Statistical Account of the
British Empire (1837)
• statistical account of failure of Malthusian population
theory
T. R. Malthus (1766-1834)
• Anglican pastor
• first Professor of Political Economy,
East India College (1805)
• Essay on Population (1798, 1803)
– “Malthusian” population theory
– opposes Poor Laws
• An Essay of the Cause of the Present
High Price of Provisions (1800)
– argued that money supply was endogenous;
rising prices followed by increased supply
of money
• An Inquiry into the Nature and Progress
of Rent (1815)
– independent discovery of differential rent
theory
Overall Vision of Classicalism
• Concentration on long-run “equilibrium”
• Theory leads Classicals to view the long-run
equilibrium as a “stationary state”
– Rents high, profits low, wages at subsistence
– Class conflict and Ricardian pessimism
• Subsistence for Classicals is psychological
subsistence (accustomed standard of living)
– Classicals generally believe that education,
custom and imitation can help raise the
subsistence wage
Population Theory
• T. Robert Malthus
– Essay on Population (1798)
• response to father, David, friend of
Rousseau and adherent of
“perfectibility” thesis of Godwin (An
Inquiry Concerning Political Justice 1793) and Condorcet
• “power of population is indefinitely
greater than the power in the earth to
produce subsistence for man”
• geometrical (doubling) progression of
population v. arithmetic progression
of sustenance
William Godwin
T. Robert Malthus
Population Theory
• checks on population - “misery and vice”
– preventative (prostitution, foregoing marriage,
etc.)
– positive (starvation, disease, war, infanticide,
etc.)
• high wages increase population and reduce
wages back to subsistence level (psychological
not physiological subsistence)
– Essay on Population (1803)
• prudential check: delayed marriage without
“irregular gratification” (not contraception)
• (though the option of contraception occurred to
Classicals soon enough)
Classical Wage Theory
• Population theory determines population,
and with a lag the supply of labor
• Capitalists determine size of circulating
capital (wage fund) based upon profitability
of investment
• Wages determined by size of the wage fund
in comparison to the supply of labor
• Wages in excess of subsistence increase
population, supply of labor increases with a
lag, wages fall back to subsistence
Classical Theory of Rent
• Dr. James Anderson (1739-1808)
– Scottish agriculturalist, farmer
– An Inquiry into the Nature of the Corn Laws (1777)
• no-rent extensive margin (extension of
cultivated land will continue until last unit of
land earns no rent); denied existence of
intensive margin
– Calm Investigation of…The Present Scarcity of
Grain (1801)
• argued that increasing returns accompany
application of labor and manure to land
Classical Theory of Rent
• Sir Edward West (1782-1828)
– Essay on the Application of Capital to Land (1815)
• David Ricardo
– An Essay on the Influence of a Low Price of Corn on
the Profits of Stock (1815)
• T. Robert Malthus
– An Inquiry into the Nature and Progress of Rent
(1815)
• Col. Robert Torrens
– An Essay on the External Corn Trade (1815)
(all published within 3 weeks in February, 1815)
Rent and Wages
• Diminishing Returns and Locational Rent
– (extensive margin) cultivation will progress to less and less
fertile land
– (intensive margin) additions of labor to a given stock of land
produce progressively less output
– some land may receive rent due to superior location
• Rent is residual from superiority of land
• Increases in population lead to extension of
cultivation to meet increased demand,
increasing rents
• Diminishing returns mean additional supply
is more costly, reducing real wage to
subsistence
Wages and Capital
• Tendency for wages to move to subsistence
can be offset by additional capital
accumulation
– fixed capital increases tools and productivity
– circulating capital increases size of wage fund
• Additional capital accumulation reduces rate
of profit in economy (to near-zero)
• Long-run tendency to reduce profits
– ends capital accumulation
– population pressures reduce wages to
subsistence
– demand for additional land to feed enlarged
population increases rent
Comparative Advantage
• Ricardo’s Principles
– Portugal and England, wine and cloth
– comparative costs of production
– argued that importation of wage goods would
lower real wages, increase profits and promote
further capital accumulation, offsetting
diminishing returns and keeping wages above
subsistence (psychological)
• Torrens’ contributions
– independent discovery in pamphlet of 1815
– “territorial division of labour” - extending Smith
Labor Theory of Value
• Ricardo’s Principles
– criticism of Smith’s “adding up” and “laborcommand” theories
• recall Smith uses the adding-up theory in
advanced state (Wages + profits + rent)
• but, prices then determined by prices
– applies only to reproducible goods (demand
determines prices of non-reproducible goods)
– Ricardo wants to advance a labor-embodied
theory of value (relative prices determined by
relative labor hours expended in production)
Labor Theory of Value
• Ricardo’s Principles
– Ricardo realizes problems of differences in
fixed/circulating capital ratios, varying durations
of fixed capital, and varying turnover rates of
circulating capital lead to different effects of
changes in quantity of labor hours to changes in
relative prices
– argues that labor and capital tend to be
proportionately applied (complementarity) so that
“most” of change in relative prices is due to
change in labor hours
– Stigler dubs this the “93% Labor Theory of Value”
– Ricardo then ignores these variations and
presumes changes in labor hours account for
entirety of changes in relative prices
The Ricardian “Socialists”
• Thomas Hodgskin (1787-1869)
– Labour Defended Against the Claims of Capital (1825)
– Popular Political Economy (1828)
– The Natural and Artificial Right of Property Contrasted (1834)
• early free market anarchist, who took labor theory of value to its exploitation logic
• John Francis Bray (1809-1895)
– Labour's Wrongs and Labour's Remedy (1839)
• labor exploitation thesis; recommended worker co-operatives in a communal
property system
• William Thompson (1775-1833)
– Inquiry into the Principles of the Distribution of Wealth Most
Conducive to Human Happiness (1824)
– Labour Rewarded (1827)
• Exploitation of labor under capitalism inevitable; workers self-management
British Subjectivists
in the Age of Ricardo
The Anti-Ricardians
• James K. Maitland,
Earl of Lauderdale (1759-1838)
– Scottish nobleman
– proposed demand and supply
determined long-run price (Ricardo’s
Principles, chapter 30)
– argued capital was substitute to as well
as complement for labor (technological
unemployment) (Ricardo’s Principles,
chapter 31)
– An Inquiry into the Nature and Origin of
Public Wealth (1804)
– A Letter on the Corn Laws (1814)
The Anti-Ricardians
• Colonel Robert Torrens (17801864)
– British army officer, owner of the
Globe newspaper
– The Economist Refuted (1808)
• defense of Say’s Law against Spence
– An Essay on the External Corn Trade
(1815)
• independent discovery of differential rent
theory
• independent discovery of comparative
advantage
The Anti-Ricardians
• Colonel Robert Torrens (17801864)
– An Essay on the Production of
Wealth (1821)
• opposes labor theory of value
• proposes “capital” theory of value
– Letters on Commercial Policy (1833)
• “territorial division of labor”
– The Budget: On commercial and
Colonial Policy (1844)
• argument for reciprocal tariffs;
exceptions to comparative advantage
The Great Critique
• Samuel Bailey (1791-1870)
– A Critical Dissertation on the Nature, Measure and
Causes of Value (1825)
• opposes labor theory of value
• argues scarcity is cause of value
• generalizes Ricardian theory of rent
– A Letter to A Political Economist Occasioned by An
Article in The Westminster Review On the Subject
of Value (1826)
– Other Works:
• The Formation and Publication of Opinions (1821)
• Questions on Political Economy… (1823)
• Money and its Vicissitudes in Value… (1837)
The Oxford-Dublin School
• Richard Whately
(1787-1863)
– Oxford philosopher
– tutor of Senior at Oxford
– Elements of Logic (1826)
– Elements of Rhetoric (1828)
– 1831, left Oxford to become
Anglican Archbishop of
Dublin
The Oxford-Dublin School
– Introductory Lectures on
Political Economy (1832)
• “It is not that pearls fetch a
high price because men have
dived for them; but on the
contrary, men dive for them
because they fetch a high
price.”
• catallactics- the science of
exchange
– 1832, endows Whately Chair
at Trinity College, Dublin
The Oxford-Dublin School
• Nassau Wm. Senior
(1790-1864)
– first Drummond Chair at
Oxford
– An Outline of the Science of
Political Economy (1836)
• utility demand/cost-ofproduction supply
• abstinence theory of capital
and interest
The Oxford-Dublin School
• William Forster Lloyd (1795-1852)
– succeeds Senior as Drummond Chair
– Lecture on the Notion of Value (1833)
• diminishing marginal utility
• connects demand to value
– Two Lectures on the Checks to Population
(1833)
• tragedy of commons
The Oxford-Dublin School
• Montifort Longfield (1802-1884)
– first Whately Chair at Trinity College,
Dublin
– Lectures on Political Economy (1834)
• diminishing degrees of intensity for demand
• demand/supply determination of value
• diminishing returns applies generally to factors
of production
• expands comparative advantage argument
beyond two-commodity case
Stranger in the Classical Land
• William Whewell (1794-1866)
– Cambridge moral philosopher,
mineralogist
– set himself the task of translating
economic theory into mathematics
• “Mathematical Expositions of Some Leading
Doctrines in Mr. Ricardo’s Principles,”
Transactions of the Cambridge
Philosophical Society (1830)
• “Mathematical Exposition of Certain
Doctrines of Political Economy,”
Transactions of the Cambridge
Philosophical Society (1850)
– Six Lectures Delivered on Political
Economy (1862)