History of Economic Thought Boise State University Fall 2015 Prof. D. Allen Dalton The British “Classicals”

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 ( ) 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 ( ) 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 ( ) 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 ( ) –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 ( ) –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 ( ) –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 ( ) 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 ) 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 ( ) –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 ( ) –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 “labor- command” 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 ( ) –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 ( ) –Labour's Wrongs and Labour's Remedy (1839) labor exploitation thesis; recommended worker co-operatives in a communal property system William Thompson ( ) –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 ( ) –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 ( ) –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 ( ) –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 ( ) –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 ( ) –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 ( ) –first Drummond Chair at Oxford –An Outline of the Science of Political Economy (1836) utility demand/cost-of- production supply abstinence theory of capital and interest

The Oxford-Dublin School William Forster Lloyd ( ) –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 ( ) –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 ( ) –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)