Classical economics

Published: August 23, 2008, 7:13 pm

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The French Moral Philosophers

Markets as a means of exchanging goods have existed from the beginnings of recorded history, but the idea of a market system as a means of maintaining an entire society did not emerge until the seventeenth century. This was a time when the old economic order, premised on custom and command, gave way to a new economic order that was sensitively dependent on the actions of profit-seeking individuals operating within the contexts of national economies. Because the complex web of institutions, laws, policies, and processes that sustain and regulate production and exchange in modern markets did not exist, the new economic order more closely resembled a buzzing confusion than a rational process.

The moral philosophers who laid the conceptual foundations for classical economics assumed that order lay beneath this chaos and that the ideal model for disclosing this order was Newtonian physics. These philosophers posited the existence of a new set of laws, the natural laws of economics, and claimed that these laws govern the behavior of economic actors in much the same way that the laws of classical physics govern the movement and interaction of material objects. Adam Smith imaged the collective action of these forces as an invisible hand, and this construct became the central legitimating principle in mainstream economic theory. As economists Kenneth Arrow and Hans Hahn put it, the “notion that a social system moved by independent actors in pursuit of different values is consistent with a final coherent state of balance….is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes.”

Adam Smith

Adam Smith derived his conception of the natural laws of economics from the work of moral philosophers now known as the French philosophes. Knowing that Copernicus, Galileo, Kepler and Newton (Newton, Isaac) believed that the laws of physics were created by God and existed in a domain separate from and superior to sensible objects and movements, they posited the existence of a new set of natural laws that had the same ontological status. The French moral philosophers claimed that these putative natural govern the interactions of atomized individuals in social reality in much the same way that physical laws govern the movement and interaction of masses in physical reality.

Baron de Montesquieu

Charles-Louis de Secondat, Baron de Montesquieu (1689-1755), appealed to Newtonian physics to create sociology, a new field of study premised on the idea that observation of empirical data could uncover laws that govern complex social phenomena. In a study of the institutions of monarchy, republic and despotism, Montesquieu agued that there is equilibrium between competing forces in social reality analogous to that in Newtonian physics. As Robert Aron puts it, “Montesquieu’s essential idea is not the separation of powers in the judicial sense but what might be called the equilibrium of social forces as a condition of political freedom.”

Francois Quesnay

A similar view of natural laws appears in the work of Francois Quesnay (1694-1774), the founder of the French Physiocratic movement. Quesnay was a physician who included among his clients Mme. de Pompadour, mistress to Louis XV. Quesnay’s primary interest, however, was to make rational sense out of the chaotic economic system of France in the years prior to the French Revolution. He and his followers sought to disclose the existence of an order of nature, or Physiocracy, in which only land yields a surplus because machines merely reshape material taken from nature with no net increase in the amount of material.

In the absence of the abstract assumptions about land, labor and capital that lend credence to the modern notion of excess value, the idea that the only source of this value is the generative powers of nature is not as strange as it might now appear. If, for example, 50 bushels of wheat yields a crop of 200 bushels, the Physiocrats would argue that the additional 150 bushels is a gift from nature with surplus value. But if men in a small factory use clay to make pots, the argument would be that the clay in the pots is no greater than that used to make the pots and, therefore, there is no increase in value.

Quesnay claimed that the natural laws that determine excess value, like the laws of Newtonian physics, are created by God and operate on atomized individuals to perpetuate and sustain the whole of human society in universal harmony. He wrote that both sets of laws, those that operate on the human intellect and those that govern the behavior of matter, constitute “the general order of the formation of the universe, where everything is foreseen and arranged by the Supreme Wisdom.” The order that results from the action of the natural laws is apparent, said Quesnay, in the continuous production and distribution of food and other goods essential to human survival. He was also convinced that these laws, like those of Newtonian physics, act with a precision that lends itself to description and analysis in geometrical and arithmetical terms: “The natural laws of the order of society, are precisely the physical laws of the perpetual reproduction of the goods necessary for man’s subsistence, conservation and well-being.”

Quesnay’s most celebrated attempt to disclose the existence of the “order of nature” took the form of a Tableau economique that was intended to provide a rigorous calculation of the effects of measures taken by the Sovereign to ensure the economic well-being of the nation. Hypothetical production and distribution figures for the national product were factored into an “arithmetical formula,” and the resulting political arithmetic allegedly provides a basis for the correct administration of the national economy based on rigorous calculation and measurement of relevant quantities. It is also worth noting that Quesnay was among the first of a long line of economic theorists who did not understand the physics upon which his economic theory is based and that the mathematics used in the Tableau was limited to arithmetic and geometry.

Anne Robert Jacques Turgot

Anne Robert Jacques Turgot (1727-1781) is recognized for articulating a view of a mechanistic economic system based on the metaphor of the circulation of blood. In this system, there is an alleged resemblance between the workings of a market and the dynamics of fluids. In contrast with the other Physiocrats, Turgot did not use mathematical formalism to develop a systematic treatment of the market. But he did manage to articulate an idea that greatly influenced Adam Smith. The idea was that there is equilibrium in market systems similar to the equilibrium of fluids in a system of interconnected vessels:

The different employments of capital produce, therefore, very unequal products; but this inequality does not prevent the exercise of a reciprocal influence on one upon the other or the establishment between them of a sort of equilibrium, as between two liquids of unequal gravity that communicate with one another at the bottom of a reversed siphon of which they occupy the two branches: they will not be on a level, but the height of one cannot increase without the other also rising in the opposite branch.

In a celebrated letter to David Hume, Turgot elaborated upon his definition of the term equilibrium. The term, he said, mirrors that in Newtonian dynamics and denotes levels of production, employment and remuneration that tend to remain in equilibrium.

Marquis de Condorcet

The Marquis de Condorcet (1743-1794), who died after spending several months in hiding as a fugitive from the Terror during the French Revolution, was a skilled mathematician who possessed a more refined understanding of Newtonian physics than his friend and mentor Turgot. Condorcet’s formidable ambition was to create a mathematique sociale that could objectively disclose the lawful dynamics governing human choice with the use of probability calculus. Since careful observation and the collection of large amounts of empirical data had previously disclosed hidden lawful dynamics in astronomy, Condorcet argued that the same methods could uncover the hidden lawful dynamics of social and economic systems:

These sciences, whose object is man himself and whose direct end is man’s happiness, are now almost established and their development will be as certain as that of the physical sciences. The cherished idea that our grandchildren will surpass us in wisdom is no longer an illusion. Whoever reflects upon the nature of the moral sciences cannot, in fact, but see that, supported by factual observation like the physical sciences, they must follow the same method, acquire an equally precise language, and attain the same degree of certainty.

Condorcet held that the mathematical tool that can yield results comparable to those in the physical sciences is probability calculus, and he used this tool in an effort to uncover the hidden dynamics of social and political realities. In a study on the democratically elected assemblies, Condorcet isolates and examines the behavior of a voter as homo suffragans—an atomized participant in the electoral process. In the probability calculus that allegedly predicts this behavior, the voter is represented as the rough equivalent of the Newtonian constructs of the material point, the line without extension, and the frictionless surface. The resulting mathematical abstraction, a dimensionless material point, possesses only one real quantity—a mass expressed in completely formal and quantitative terms. Hence homo suffragans is a social atom that has been divested of all human qualities other than the social faculty of voting.

Adam Smith derived much of his mechanistic understanding of how the natural laws of economics could govern the movement and interaction of atomized individuals from the work of Condorcet. And this understanding was translated into a slightly different form after the creators of neoclassical economics substituted economic variables derived from classical economics for the physical variables in the equations of a mid-nineteenth century theory in physics.

Adam Smith and the Invisible Hand

Adam Smith (1723-1790), who was notoriously absent-minded, lectured much of his life on problems in moral philosophy at the University of Glasgow. The discipline of moral philosophy, which was much more broadly defined than it is today, covered natural philosophy, ethics, jurisprudence and political economy. It was on this broad canvas that Smith attempted to depict the inner workings of the cosmic machine and the place of human beings within its systems, wheels and chains.

Understanding the work of Adam Smith as a whole is recognized as notoriously difficult due to what an earlier generation of German scholars termed “das Adam Smith Problem.” The problem concerns the glaring contradiction between the themes in Smith’s two books—self-interest in The Wealth of Nations (1776) and sympathy in The Theory of Moral Sentiments (1759). Some have argued that these contradictions result from some radical change in the worldview of Smith during the seventeen-year period between the first publications of the two books. The problem with this thesis is that both books were rather consistently revised and edited for five or more editions in Smith’s lifetime and the final edition of The Theory of Moral Sentiments was published in the year of his death (1790). More important, Smith viewed both books as part of a single corpus, and his reasons for doing so become clear when they are read in this way.

Smith embraced a new understanding of the nature and function of God, known as Deism, that grew out of attempts to reconcile the existence of God with the implications of Newtonian physics. Since this physics assumes that physical laws completely determine the future state of physical systems, the Deists concluded that the universe does not require, or even permit, active intervention by God after the first moment of creation. They then imaged God as a clockmaker and the universe as a clockwork regulated and maintained after its creation by physical laws alone. Smith’s mechanistic world view explains why he made such extensive use of mechanical metaphors and analogies. It was also the foundation for his belief that two disembodied sets of natural laws regulate and maintain the orderly machinations of the clockwork— the laws of Newtonian physics and the natural laws of the market system.

Although the construct of the invisible hand is the ghost in the machine in virtually all of Smith’s writings, it is explicitly mentioned only three times in three very different theological contexts. In the essays, the invisible hand is that of Jupiter and the construct is used to illustrate how primitive or “savage” people dealt with the irregular phenomena of nature. In The Theory of Moral Sentiments, the hand belongs to a Deistic providence which ensures that the less fortunate are fed in spite of the greed of the rich. In The Wealth of Nations, the hand is the metaphor for the natural laws that act to maintain harmony and stability in market systems with the same impersonal force as the laws of physics. Taken together, the essays and The Theory of Moral Sentiments constitute a critique of the history, sociology and psychology of religion. This critique is designed to demonstrate that during the course of civilization polytheism is replaced by theism and human beings eventually came to realize that nature is a system or machine that obeys both physical and natural laws.

In the long essay on astronomy, the invisible hand of Jupiter symbolizes the “principles that lead and direct philosophical inquiries,” which Smith defines as the passions of wonder, surprise and admiration. In the section entitled “Of the Origin of Philosophy,” he claims that polytheism originated among primitive people and was a product of the “vulgar superstition which ascribes all the irregular events of nature to the favour or displeasure of intelligent, though invisible beings, to gods, daemons, witches, genii, fairies.” These primitive people, who were not aware of the existence of nature’s “hidden chains,” were awed, says Smith, by “magnificent” irregularities, such as thunder, lightning and comets. He then mentions the invisible hand in an effort to explain why such people responded differently to regular and irregular phenomena:

It is the irregular events of nature only that are ascribed to the agency and power of the gods. Fire burns, and water refreshes; heavenly bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters.”

The reason why these savage people associated the activities of the gods with irregular events, says Smith, is that man was the only “designing” power that they knew and man “never acts but either to stop, or to alter the course, which natural events take, if left to themselves.” He also claims that the fundamental problem with the “lowest and most pusillanimous superstition” of these savages was that it prevented them from realizing that “hidden chains” link all events to the invisible causes of physical and natural laws.

Smith (Smith, Adam) frequently identifies nature with the way things operate on their own accord, and the goal of philosophy, he said, is to “lay open” the “invisible chains which bind together” the natural world. It is, therefore, no accident that the argument for the system of natural liberty in The Wealth of Nations is designed to promote trust in the “natural course of things.” This trust is warranted, says Smith, because the “hidden chains” of the invisible hand regulate the “system of natural liberty” and constrict the sphere of human “intention and foresight.” His argument for the existence of this system is premised on the assumption that “no human wisdom or knowledge could ever be sufficient” to provide the sovereign with the ability to effectively manage the “industry of private people” and direct it “toward the employments most suitable to the interests of society.” Based on the assumption that human beings, individually and collectively, cannot effectively manage market economies or predict their futures, Smith concluded that the only alternative for an economic actor is “to pursue his interests in his own way” within “the laws of justice.”

The usual interpretation of Smith’s system of natural liberty is that it legitimates the idea that each of us should have the freedom to pursue our livelihood and self-interest in the absence of traditional political, religious and moral constraints. Since this system requires that the role of government be limited, it is also widely assumed that Smith makes government the servant of individualism. The problem with these interpretations, which are typically used to support the claim that that Smith was a libertarian, is that the system of natural liberty is embedded in larger systems and all of these systems obey natural laws.

In the section on education in The Wealth of Nations, Smith first endorses the idea from the ancient Greeks that philosophy should be divided into natural philosophy, which would later be called “physics,” moral philosophy, and logic. He then argues that this division requires that the study of both the human mind and “the Deity” must fall under the province of physics, which investigates “the origin and the revolutions of the great system of the universe.” Smith then concludes that the human mind and the Deity “in whatever their essence might be supposed to consist, were parts of the great system of the universe.”

In the physics essay, Smith criticizes those who attempt to explain nature’s “seeming incoherence” by appealing “to the arbitrary will of some designing, though invisible beings, who produced it for some private and particular purposes.” He then proceeds to fault the superstitious for their inability to conceive of the “idea of a universal mind, of a God of all, who originally formed the whole, and who governs the whole by general laws, directed to the conservation and prosperity of the whole, without regard to that of any private individual.” But as our ancestors progressed in knowledge, says Smith, they achieved a higher understanding of the relationship between parts and wholes and realized that nature is “a complete machine…a coherent system, governed by general laws, and directed to general ends, viz., its own preservation and prosperity.”

Clearly, Smith believed that the universal mind of God served as a template for the creation of a world that is entirely governed following its creation by general laws. His phrase “general laws” refers to both physical and natural laws, and he implies that they have the same ontological status—both originate from the universal mind of a Deistic God, exist in a realm separate and discrete from the material world, and act on atomized parts to maintain the stability of the whole.

The special character of Smith’s metaphysics allows us to answer a question that has perplexed most experts on the history of economic thought: Why does Smith appeal to God to legitimate the existence of the invisible hand in his other major work, The Theory of Moral Sentiments, and yet refrain from doing so in The Wealth of Nations? The answer is that the understanding of the character of natural laws in The Wealth of Nations is more narrowly predicated on the assumption that these laws have co-equal status with physical laws. The omission of any appeals to God not only serves to reinforce the seeming validity of this assumption. It also implies that the real existence of the natural laws is self-evident, and, therefore, that any appeal to metaphysics is ad hoc and unnecessary.

Smith’s metaphysics also allows us to understand why he had no difficulty arriving at the conclusion that natural laws act to preserve the whole (human population) without regard for the well being of particular parts (individuals). In his view, mind and nature are systems or machines that do not require any “personal” intervention because the orderly relation between parts is entirely maintained by general laws. This also explains why the biblical God, who disrupts the orderly workings of nature by staging miracles and singles out individuals or groups for covenants, revelations, rewards and punishments, is conspicuously absent in virtually all of Smith’s work. From his perspective, this God is a product of the frenzied imagination of those who did not realize that nature is “a complete machine” in which “hidden chains” govern the orderly interaction of parts to preserve the existence of the whole.

These views are apparent in Smith’s descriptions of the workings of the invisible hand in The Theory of Moral Sentiments. Here the hand is part of the “regular” workings of nature and ensures that social benefits result as an unintended outcome of selfish actions. Smith argues, for example, that the invisible hand increases the fertility of the earth and benefits the whole of mankind despite inequality in capital resources and ownership of land. But since the landlord, writes Smith, can only eat a portion of the produce of his land, the remainder is consumed by those who provide him with luxuries. Hence the rich, despite their “natural selfishness and rapacity,” are led by an invisible hand "to make nearly the same distribution of the necessities of life which would have been made had the earth been divided into equal portions among all its inhabitants; and thus without intending it, without knowing it, advance the best interests of society, and afford means to the multiplication of the species."

Smith consistently views ideas as systems and places a great deal on emphasis on the alleged similarity between these systems and machines. A machine, wrote Smith, “is a little system created to perform, as well as to connect together, in reality, those different movements and effects which the artist has occasion for.” He goes on to say that a system “is an imaginary machine invented to connect together in the fancy those different movements and effects which are already in reality performed.” The obvious question here is that if the behavior of atomized economic actors is controlled by the “invisible chains” of natural law in the system of the universe, what does this imply about the system of natural liberty?

Smith answers this question by claiming that a natural order emerges when conscious interference with an economic system is minimized and that the system of natural liberty contributes to the maintenance of this order. Yet his argument for the existence of the system of natural liberty is predicated on the assumption that “no human wisdom or knowledge could ever be sufficient” to create or sustain this order. Some have attempted to resolve this paradox by arguing that Smith distinguishes between a macro-level where natural laws govern the state of the whole (market system) and a micro-level where the parts (economic actors) enjoy a radical freedom to pursue their self-interests. For Smith, however, macro-level order and micro-level actors are intimately connected.

In The Theory of Moral Sentiments, Smith makes this connection clear in his commentary on the Stoic philosophers: “A wise man does not look upon himself as a whole, separated and detached from every other part of nature, to be taken care of by itself and for itself.” He rather considers himself as “an atom, a particle, of an immense and infinite system, which must and ought to be disposed of according to the convenience of the whole.” The basic argument here is that since natural laws act on the parts (atomized individuals) to enhance the welfare of the whole (human population) as a collection of parts, the freedom of the parts is necessarily constrained by these laws. In the “great machine of the universe” with its secret wheels and springs,” the system of natural liberty may allow the atomized individual to live with the illusion that his or her actions are freely taken. But as the wise man knows, this freedom does not, in fact, exist because the “connecting chains” of the invisible hand sustain the whole (economy) in the absence of conscious intervention by parts (economic actors).

This understanding of the relationship between the whole and its parts informs Smith’s commentary on the “prudent man’ in The Wealth of Nations. The prudent man is praised for his “industry and frugality” and for “steadily sacrificing the ease and enjoyment of the present moment.” The reward for this virtue is that the “situation” of this man grows “better and better every day.” In addition to celebrating the economic virtues of the prudent man, Smith also stresses his apolitical character. The prudent man “has no taste for that foolish importance which many people wish to derive from appearing to have some influence in the management” of public policy. Such a man prefers “that the public business were well managed by some other person” so that he is left to “the undisturbed enjoyment of secure tranquility.” The clear inference is that this tranquility derives from the recognition that public affairs are managed in ways that sustain order and stability by natural laws and that the actions of atomized individuals only serve to frustrate the proper functioning of these laws.

Smith’s understanding of natural laws also explains why he consistently denigrates the power of human choice and alleges that the actions of individuals have had little or no impact on the course of history. Smith talks a great deal about great moments in history, but he never suggests that these moments are due to the actions of great men. The driving force that inexorably moves the whole of humanity toward greater wealth and progress with something like the precision of a linear equation is that of natural laws. This view is apparent in The Theory of Moral Sentiments in the beginning of the paragraph on the invisible hand:

And it is well that nature imposes upon us in this manner. It is this deception that rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and the arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the world. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants.

The natural laws that impose on atomized human beings and keep them in motion within evolving systems and machines are not dependent in their operation on the intelligence and creativity of individuals, even in the sciences and the arts. Even more interesting from an ecological perspective, the laws that govern the ever-expanding market systems obliged “earth” to “redouble her natural fertility” to maintain the growing human population.

Thomas Malthus

Thomas Malthus (1766-1834) endorsed Smith’s understanding of the natural laws of economics and attempted to tighten the “invisible chains” that “connect” parts in the machine of the market system in a more rigidly deterministic way. Malthus wrote his famous essay “On the Principle of Population as It Affects the Future Improvement of Society” in response to the views of a utopian thinker named William Godwin. In Godwin’s teleological account of the human future, the sexual passions that lead to increases in birth rate would somehow diminish after a universal harmony in social and political reality is achieved. When that occurs, wrote Godwin, “there will be no war, no crime, no administration of justice, as it is called, and no government. Besides there will be no disease, anguish, melancholy, or resentment.”

Malthus’ dissenting views were published anonymously in 1798. The usual interpretation of his principle of population is straightforward— since population increases geometrically and food supply increases arithmetically, there is a tendency for population growth to outrun the means of subsistence. Note, however, the manner in which this argument is actually made:

I think I may fairly make two postulata.
First, That food is necessary to the existence of man.
Secondly, That the passion between the sexes is necessary and will remain nearly in its present state.
These two laws, even since we have had any knowledge of mankind, appear to have been fixed laws of nature, and, as we have not hitherto seen any alteration of them, we have no right to conclude that they will ever cease to be what they now are, without an immediate act of power in that Being who first arranged the system of the universe, and for the advantage of his creatures, still executes, according to fixed laws, all its various operations.

Although Malthus, an ordained clergyman, allows for the prospect that the “laws of nature” could be altered by an “immediate act of power in that Being who first arranged the system of the universe,” his conception of this Being closely resembles the Deistic God of Smith. For example, the claim that “fixed natural laws,” like the laws of physics, govern the “various operations” of the “system of the universe” in a causal and deterministic fashion clearly implies that the system does not need or require any intervention from God or any other “external” agency.

While Smith (Smith, Adam) argued that the natural laws that determine the future of markets are essentially benevolent, Malthus concluded that the laws of population could ultimately threaten the very existence of humanity:

Assuming then, my postulata as granted, I say that the power of population is indefinitely greater than the power in the earth to produce subsistence for man.
Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will show the immensity of the first power in comparison of the second.
By that law of our nature which makes food necessary to the life of man, the effects of these two unequal powers must be kept equal.
This implies a strong constantly operating check on population from the difficulty of subsistence. This difficulty must fall some where and must necessarily be severely felt by a large portion of mankind.

Although the inequality between the powers associated with these natural laws could have disastrous consequences for all of mankind, Malthus claims that this will not occur because the interplay between them results in “a strong constantly operating check” on population growth that impacts only a “portion” of mankind. Assuming, like Smith, that impersonal and deterministic natural laws govern the interaction between parts (individuals) to perpetuate the existence of the whole (species), Malthus concludes that we should not interfere with the operation of the laws. In his view, the death of large numbers of the working poor is the unfortunate but inevitable result of the operation of the lawful mechanisms of an essentially benevolent nature. But as his biographer, James Bonar notes, the logic that led Malthus to this conclusion was apparently lost on his contemporaries:

He was the best abused man of his age. Bonaparte himself was not a greater enemy of the species. Here was a man who defended small-pox, slavery and child-murder—a man who denounced soup-kitchens, early marriages and parish allowances….From the first Malthus was not ignored. For thirty years it rained refutations.

The natural laws of Smith may be more benevolent and less menacing than those of Malthus but there is no difference between them in ontological terms. The natural laws of both Smith and Malthus are created by a God who withdraws from the universe after the first moment of creation, exist in a realm prior to and separate from physical reality, and act causally and deterministically on atomized parts (individuals) to sustain the whole (species). The assumption that the “unseen chains” of the laws of population, like those of the natural laws of economics, cannot be broken also served to reinforce the view that social-political problems do not lie within the domain of economic theory. This premise allowed subsequent generations of economists to argue that the business of economists is to describe the lawful workings of the free market system and not to concern themselves with problems that exist in “other” domains of reality.

David Ricardo

David Ricardo (1772-1823) was the son of Jewish merchant-banker who emigrated from Holland, and his expertise as a stockbroker allowed him to retire with a large fortune at the age of forty-two. The mechanistic system of the market in Ricardo’s On the Principles of Political Economy (1817) is as abstract and unadorned as a linear equation, and the atomized entities within this system are “forced” to obey the “laws of behavior.” Workers appear, as Robert Heilbroner puts it, as “undifferentiated units of economic energy, whose only human aspect is a hopeless addiction to what is euphemistically called ‘the delights of domestic society.’” And capitalists are depicted as “a gray and uniform lot, whose entire purpose on earth is to accumulate—that is, to save profits and to reinvest them by hiring more men to work for them; and this they do with unvarying dependability.”

One of Ricardo’s burning ambitions was to repeal a set of laws passed by a majority of landowners in Parliament that were designed to prevent cheap grain from being imported into Britain. In his view, the so-called Corn Laws were an obvious impediment to improving national welfare and most of his economic theory is intended to demonstrate that this is the case. Like Smith, Ricardo believed that a market system constantly tends to expand and that the resulting new shops and factories create more demand for labor. As the population increases, the increased demand for grain would, he says, result in higher prices and in the cultivation of more marginal land.

What is not revealed in the standard textbook definition of the Ricardian theory of rents is the uses made of the assumption of the Physiocrats that only land yields surplus value and the view of the resources of nature that results. The following is from the chapter “On Rent” in On the Principles of Political Economy:

Rent is the portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil. It is often, however, confounded with the interest and profit of capital, and, in the popular language, the term is applied to whatever is annually paid by a farmer to his landlord…..But it is evident, that a portion only of the money annually to be paid for the improved farm, would be given for the original and indestructible powers of the soil; the other portion would be paid for the use of the capital which had been employed in ameliorating the quality of the land, and in erecting such buildings as were necessary to secure and preserve the produce.
On the first settling of a country, in which there is an abundance of rich and fertile land, a very small proportion of which is required to be cultivated for the support of the actual population, or indeed can be cultivated with the capital which the population can command, there will be no rent; for no one would pay for the use of the land, when there is an abundant quantity not yet appropriated, and therefore, at the disposal of whosoever might cultivate it.
On the common principles of supply and demand, no rent would be paid for such land, for the reason stated why nothing is given for the use of air and water, or for any of the gifts which exist in nature in boundless quantity.

For the Physiocrats, only land can produce surplus value (Value theory) and capital investments do not increase this value. Ricardo argues, however, that while fertile land in earlier times was a gift of nature that existed in such abundance that it was regarded as free, progress has resulted in a situation in which fertile land is less available and capital investment is required to increase production. He then argues that the cultivation of the more marginal land necessarily increases the overall costs of production and that this is reflected in higher prices for grain and increases in rent for the landlord who owns the best land.

Rent as Ricardo defines it is the difference in profits that results when the costs of growing crops on fecund land are less that those of growing crops on less fecund land. In both instances, landlords must pay the same wages and bear the same capital expenses. However, the landlord who owns the more fertile land reaps more profits than his competitors. The problem with this picture, says Ricardo, is that the group that is responsible for this progress, the capitalists, are obliged to pay higher subsistence-level wages to workers while the rising aggregate of rents increases the profits of landlords.

What is significant here is the assumption that the “laws” of supply and demand determine which quantities in nature are free and which are included within the system of the market. When land is plentiful, there is no rent because land has no market value and no one would elect to use his “capital” to buy and cultivate what exists in abundance. The following passage further illustrates this point:

If air, water, the elasticity of steam, and the pressure of the atmosphere, were of various quantities; if they could be appropriated, and each quality existed in only moderate abundance, they, as well as the land, would afford a rent, as the successive qualities were brought into use. With every worse quality employed, the value of the commodities in the manufacture of which they were used, would rise because equal quantities of labor would be less productive. Man would do more by the sweat of his brow, and nature perform less; and the land would no longer be imminent for its limited powers.

Based on the assumption that the only natural resources that have value are those that are subject to the law of supply and demand, Ricardo argues that the resources of nature are free unless, or until, they become sufficiently scarce to warrant the capital investment that would allow for their appropriation and sale. Although he implies that more of these resources will have value due to the inevitable expansion of [[market]s] and the associated emergence of new manufacturing techniques, the assumption that lies at the core of his argument is that the powers of nature are inexhaustible. It is this assumption that allows Ricardo to argue that there are no limits on the growth and expansion of markets.

Ricardo also formulated another idea predicated on the assumption that the resources of nature are unlimited that has assumed increasingly more importance during the present era of globalization. He argued that since costs of production in countries with different technologies, resources and customs are not the same, a country that produces goods at costs comparatively lower than in other countries and trades with these countries has a comparative advantage. But if all countries specialize in production where they have comparative advantages and trade with each other, Ricardo concluded that total production would be maximized and there would be more wealth to share. He also assumed, however, that investment capital is immobile and confined within national boundaries. If this were not the case, then investment capital would flow to the country with the absolute advantage in production and other nations would suffer. The irony here is that contemporary proponents of economic globalization endorse a policy of capital mobility between nations as a development strategy in spite of the fact that their understanding of the advantages of globalization is premised on a theory developed by Ricardo which assumes that this mobility does not exist.

Some historians of mainstream economics recognize that the French moral philosophers who influenced Smith’s conception of natural laws made overt appeals to metaphysics to legitimate the existence of these laws. Nevertheless, most avoid confronting the Adam Smith problem by extracting well-known passages from The Wealth of Nations and treating them as pieces of revisionist history. Others seek to avoid the problem by arguing that The Wealth of Nations, given the absence of appeals to the Judeo-Christian God, is an entirely secular study of economic reality that is different in kind from Smith’s other works. But a careful reading of all of Smith’s work discloses that the invisible hand is a metaphysically based construct and that his belief in its actual existence was an article of faith.

Classical economics

Contents

The French Moral Philosophers

Adam Smith and the Invisible Hand

Thomas Malthus

David Ricardo

Further Reading

Citation

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