A History of Economic Thought
by Isaak Illich Rubin
Modern political economy came into being and developed in parallel with the emergence and growth of capitalist economy, its object of study. In its evolution it reflected the evolution of capitalist economy and that economy’s ruling class, the bourgeoisie. Mercantilist literature, for example, clearly expressed the concerns and requirements of merchant capital and the commercial bourgeoisie
From the middle of the 18th century, when strict state regulation and the monopolies of the trading companies had begun to put a brake on the growth of industrial capitalism, there was wide-spread opposition to mercantilist ideas. In agricultural France it was the Physiocrats who took up the struggle against mercantilism, under the slogan of fostering productive agricultural capital. The efforts of the Physiocrats ended in practical – and, to a lesser extent, theoretical – collapse.
It fell to the English Classical school, which expressed in the first instance the interests of the industrial bourgeoisie, to make the major practical and theoretical advances. In Smith’s doctrine the task of waging a struggle against the antiquated restrictions fettering the growth of the capitalist economy managed to conceal and push into the background the conflicting interests of the different classes that make up bourgeois society. Ricardo’s doctrine provided the theoretical foundation for the bourgeoisie in its clash of interests with the landowning class, a clash that revealed itself with bitter intensity in England at the beginning of the 19th century
At the same time Ricardo could not fail to acknowledge that the bourgeoisie and the working class also had divergent interests – an admission which already contained the seeds of the Classical school’s disintegration. With the successful conclusion, in the 1830’s, of its struggle against the landlords, the bourgeoisie began to feel itself increasingly threatened by the rising working class: the Classical school’s decomposition proceeded at an accelerated pace.
1. Mercantilism [sixteenth and seventeenth centuries in England]
Mercantilist policy, which accelerated the breakup of the feudal economy and the guild crafts, corresponded to the interests of the commercial bourgeoisie and merchant capital. Its main objective was to foster a rapid growth of foreign trade (together with shipping and such exporting industries as woollen textiles), striving in particular to reinforce the influx of precious metals into the country, which in their turn accelerated the transition from a natural to a money economy. It is therefore understandable that mercantilist literature focused its attention primarily on two, closely inter-related problems: 1) the question of foreign trade and the balance of trade, and 2) the question of regulating the circulation of money. We can distinguish three periods in the way the solution to these problems was approached: a) the early mercantilist period, b) the period of developed mercantilist doctrine, and c) the beginnings of the anti-mercantilist opposition:
a) The early mercantilists devoted their attention mainly to the circulation of money, which went through a period of almost total disarray during the 16th and 17th centuries In part this was due to the; ‘price revolution’ which was taking place at the time, and in part because sovereigns were debasing metal coins.
The debasement of metal coins, the worsening of the currency’s rate of exchange, and the outflow of coins of standard value to other countries were severely affecting the interests of the commercial bourgeoisie. The early mercantilists of the 16th and early 17th centuries were advocates of the ‘money balance system’, and believed that it would be possible to extirpate these evils through compulsory governmental regulation over the circulation of money In particular, they demanded an absolute prohibition on the export of metal coins, hoping that by this means the country’s ‘monetary balance’ would improve.
b) The later mercantilists of the 17th century had already come to understand that fluctuations within the sphere of monetary circulation (a deteriorating rate of exchange and the export of metal coins) result from a country’s unfavourable balance of trade. They did not believe it possible to regulate the flow of money directly, and so advised those in power to concentrate their energies on regulating the country’s balance of trade by stimulating its commodity exports to other countries In particular they recommended the development of export industries (so that more expensive industrial manufactures could be exported, rather than raw materials) and the transit trade (i.e., the purchase of colonial commodities in oceanic countries, such as India, to be sold in the European countries at higher prices).
c) In England, the theory of the ‘balance of trade’ was expressly developed in Thomas Mun’s work, England’s Treasure by Forraign Trade, written in 1630 but not published until 1664.
With the end of the 17th century an opposition to mercantilism had already begun to appear. Dudley North (1641-1691) was one of the first free traders. He called on the state to refrain from exercising compulsory regulation both over the flow of money to and from other countries, and over the circulation of commodities between them North demanded full freedom of foreign trade and believed it beneficial for both monetary and commodity circulation to be self-regulating.
The economists who debated the problems of the monetary balance and the balance of trade were primarily interested in those practical questions which touched the interests of the commercial bourgeoisie Alongside this ‘merchant’ current in mercantilist thought, there appeared, at the end of the 17th century, a ‘philosophical’ tendency whose representatives (Petty, Locke, Hume) exhibited great interest in working out theoretical problems, first and foremost those of value and money.
As soon as economists directed their thinking toward the theoretical analysis of economic phenomena they found themselves confronted with the problem of value.
In the Middle Ages, when prices were compulsorily fixed by the town and guild authorities, the problem of value had been posed normatively: the Scholastic writers argued over the ‘just price’ (justum pretium) that needed to be compulsorily established to assure the craftsman his customary standard of living. During the age of merchant capital the formation of prices via regulation gradually ceded to the spontaneous formation of prices through the market. The economists of the 17th century now found themselves facing a new theoretical problem: what were the laws that governed this market formation of prices? Answers to this question were still superficial and undeveloped John Locke (1632-1704), the well-known philosopher answered that the movement of prices depended on alterations in demand and supply. Nicholas Barbon (1637-1698), his contemporary, advanced the theory of ‘subjective utility’: in his words, ‘The Value of all Wares, arise from their Use’, and depends on the ‘Wants and Wishes’ of those who consume them. A more profound attempt to find a law-determined regularity to what was at first glance the disorderly and haphazard movement of prices was made by James Steuart (1713-1780), one of the later mercantilists and an advocate of the theory of ‘production costs’. In his view a commodity has a ‘real value’ equal to its costs of production. The price of the commodity cannot be lower than this real value, but is customarily higher, the surplus comprising the industrialist’s ‘profit’ Profit, therefore, is something added onto the commodity’s value and accrues to the industrialist because he has managed to sell it under favourable circumstances – i.e. , it is ‘profit upon alienation.’ The idea that profit is created within the process of circulation is encountered in almost all mercantilist writing and reflects the conditions within the age of merchant capitalism, when there were colossal profits to be made from foreign trade, the colonial trade in particular. From a theoretical point of view, the doctrine of ‘profit upon alienation’ signified a complete repudiation of any solution to the problem of profit and surplus value in general. The most sophisticated solution to the problem of value came from William Petty (1623-1687), the ingenious progenitor of the labour theory of value. According to Petty’s doctrine, a product’s ‘natural price’ or value is determined by the quantity of labour expended on its production. When a producer exchanges his product he receives a quantity of silver (money) in which there has been embodied as much labour as he himself had expended on producing the product in question. The value of a product, bread, for example, will resolve itself into two components: 1) wages, which equal the worker’s necessary minimum of means of subsistence (Petty and other mercantilists were advocates of the ‘iron law of wages’, in the sense that they recommended limiting the workers’ wages to a minimum of means of subsistence in the interests of capitalism’s development), and 2) ground rent. Consequently Petty identifies ground rent with surplus value in general, a view which was widely held in a period when capitalism was only just developing, and which later on was explicitly adopted by the Physiocrats.
In making this identification Petty prevented himself from posing the problem of surplus value; yet despite falling into innumerable contradictions in the way he stated it, in his labour theory of value Petty laid the foundation on which the Classics and Marx were later to construct the theory of surplus value. It is safe to say that Petty’s theory of value is the most valuable theoretical legacy, that mercantilist literature was to bequeath
The other theoretical problem besides the theory of value that attracted the mercantilists’ attention was that of money. The entire body of old mercantilist literature had revolved around the practical problems of monetary circulation: debasement of metal coins, the export of money abroad, etc. By the end of the mercantilist period, however, we already, find Hume and Steuart making more or less mature reflections and formulations of the two conflicting theories of money which are still to this day struggling for scientific supremacy. The famous philosopher, David Hume (1711-1776), provided an explicit formulation of the ‘quantity theory’ of money, according to which the value of a monetary unit depends upon the quantity of money in circulation: the value of money changes inversely to variations in its quantity. The ‘quantity theory’ had first been formulated as early as the 16th century, under the impact of the ‘price revolution’ provoked by the inflow of precious metals from America. Hume, however, deepened and refined it Hume’s opponent on this question was the man already mentioned, James Steuart, who argued that the quantity of money in circulation depends on the needs of commodity circulation. Steuart’s ideas were later taken over by Thomas Tooke (1774-1858) in the first half of the 19th century and subsequently developed by Marx
2. The Physiocrats [second half of the eighteenth century in France]
The term ‘Physiocrats’ came to be applied to a group of economists who had come onto the scene in the 1760’s, primarily in France. The head of the school was François Quesnay (1694-1774), who grouped around himself a number of disciples and partisans. After a brief period of brilliant success, Physiocratic doctrine was supplanted by the theories of the new ‘Classical’ school that had emerged in England and was for a long time regarded with scorn and even mocked. Marx was one of the first to note the Physiocrats’ scientific merits, and they were later to gain increasingly widespread scientific recognition.
While mercantilist doctrine reflected English economic conditions during the age of merchant capital Physiocratic theory corresponded more to the economic and social conditions of mid-18th-century France. This was a time when France was involved in a global struggle with England for naval, commercial, and colonial supremacy and, after protracted wars, had been forced to cede first place to its rival. The mercantilist policy – pursued with especial determination the ministry of Jean-Baptiste Colbert (1665-1683) – of encouraging industry, shipping, and trade at state expense had failed to attain its objectives and had devoured enormous resources.
The combined effect of mercantilist policy and feudal survivals had resulted in the devastation of agriculture. A myriad of factors was operating to hold back agricultural growth: a backward agricultural technology, accompanied by poor harvests; the mercantilist policy of forbidding coin exports, which depressed com prices; and a tax system the entire weight of which fell on the peasantry and spared the gently. In their programme of economic reforms the Physiocrats strove to eliminate each of these factors. They fervently championed the type of rational agriculture that had met with remarkable success in England. They recommended that land be leased to large-scale farmers with abundant capital. They demanded the repeal of prohibitions on the export of corn, arguing the benefit of high com prices and low prices on industrial goods. Finally, in order to insulate the farmer from heavy taxes, they called for all taxes to be shifted onto the rent received by the landlords.
The Physiocrats’ economic programme, especially their scheme for tax reform, corresponded to the interests of the rural bourgeoisie and was directed against the feudal gentry However, as they could not rely on any influential social class (the rural bourgeoisie in mid-18th-century France being too small and inconsequential), the Physiocrats pinned their hopes mainly on the crown, whom they expected to carry out the desired reforms It is therefore quite understandable that the Physiocrats did as much as they could to dull that edge of their programme directed against the feudal gently and instead sharpened the attack on mercantilist policy. They shunted the bourgeois character of their programme to the rear and emphatically stressed its agrarian nature. The slogan of defending agriculture from the harmful consequences of mercantilist policy became the Physiocrats’ favourite watchword.
The mercantilists had maintained that the best means for making a country wealthy was to extensively develop foreign trade. The Physiocrats acknowledged the only source of a nation’s wealth to be agriculture. The mercantilists had seen foreign trade as the miraculous source of the flow of precious metals and enormous profits into the country. In order to refute these mercantilist notions, the Physiocrats had to construct a new doctrine of money and surplus value. It was their view that money was nothing more than a convenient aid in the circulation of products: a nation’s wealth consisted of products, not money. But since industrial products were nothing more than raw materials obtained from agriculture and refashioned by the labour of the industrial population, and since the latter obtained its means of subsistence likewise from agriculture, a nation’s wealth ultimately consisted of agricultural produce, or the material substance which the agricultural population extracted from the bountiful lap of mother nature. Wealth was created only in the process of agricultural production, and not in the process of circulation. Thus the mercantilist policy of one-sidedly and artificially encouraging trade and industry at agriculture’s expense was both the height of absurdity and harmful – for such a policy of stringent state regulation and restriction places constraints on individual economic freedom and therefore violates the laws of ‘natural right’ (laissez faire: “allow to do”).
To give their programme of economic policy a more solid foundation the Physiocrats constructed their theoretical system, the central tenets of which were: 1) the doctrine of ‘net product’, and 2) the theory of the reproduction of social capital.
To demonstrate the need to pump capital out of trade and industry and into agriculture, the Physiocrats advanced the doctrine that only agriculture creates a ‘net product’, or ‘revenue’ (i.e., surplus value). In agricultural production nature’s bounty provided man with a greater quantity of material substance than was needed merely to provide for the cultivator and to restore his costs of production. This surplus material substance, or ‘net product’, went to the landlords as rent on their property and formed the basis of the nation’s wealth. It constituted the fund that ‘fed’ the industrial population in the towns and coveted the expenditures of the state apparatus. Thus, for the Physiocrats agricultural labour was the only labour that was truly ‘productive'; industrial labour was ‘sterile’ labour, in the sense that it yielded no ‘net product’ over and above production costs.
To illustrate more clearly the dependence that the landowning and industrial classes had on the class of farmers (which Quesnay viewed as being representative of the entire agricultural population), Quesnay created his famous theory of reproduction, which he set out in his Tableau Economique (1758). In the Tableau Quesnay showed how the total product of a nation’s annual production moved. The entire corn harvest went first of all into the hands of the farming population, which retained part of it for its own provision and paid a part over to the landlord class as rent; a third part of the agricultural produce (taw materials for industrial processing and means of subsistence) passed into the hands of the industrial class, which in turn sent back finished products – partly to the class of cultivators, partly to the landlords. Parallel with the movement of products between the individual social classes, but in the reverse direction, ran the movement of money, which functioned merely in a servicing capacity, to mediate the circulation of commodities. As depicted by Quesnay, the entire process of distributing the social product between the separate social classes was such that in the end all classes in society had their consumption needs met and a new cycle of reproduction was all set to begin. The Tableau Economique represented Quesnay’s most important: theoretical legacy. It was the first, ingenious attempt to capture the entire process of social reproduction, embracing the production; circulation, distribution, and consumption of the social product within a single scheme. Whilst the mercantilists had occupied themselves with debating isolated, and usually practical problems, Quesnay made a bold attempt to uncover the mechanism of capitalist reproduction as a whole – an attempt which earns him the right to be called the: father of contemporary political economy. In his theory of reproduction, Quesnay was far ahead of his time. Even the Classical economists proved unable to grasp this theoretical achievement; only Marx was to develop it further.
There is also a valuable theoretical idea in the Physiocratic doctrine of ‘net product’, although it is hidden beneath a fantastic integument. For the mercantilists the source of profit was trade, while profit was the surplus that remained after covering production costs. The Physiocrats taught that this surplus, or net income, is formed strictly within the process of agricultural production. Consequently they shifted the source of the formation of surplus value out of the circulation process and into the process of production. This was a new formulation of the problem of surplus value and constitutes one of the Physiocrats’ great merits. They were unable to solve it, however, because of their naive naturalism, which put the physical productivity of the soil in place of the economic productivity of labour, and the production of material substance in place of the production of value. It was necessary to give a new basis to the theory of value so forcefully advanced by the Physiocrats, namely the labour theory of value set out by the mercantilists, and by Petty in particular. It fell to Adam Smith to carry out that task.
3. Adam Smith (1723-1790) and The Wealth of Nations (1776)
The mercantilists acted as defenders of the interests of merchant capital, but by the 18th century mercantilist policy had already become a brake on the further development of capitalism: it was retarding the transition from the rule of merchant capital to the rule of. industrial capital. In France the rural bourgeoisie, for whom the Physiocrats acted as plenipotentiary, was numerically small and had little influence Hence the Physiocrats were powerless to crush merchant capital’s domination. Only the industrial bourgeoisie in the towns had the power to smash the rule of mercantilism; similarly, at the level of economic theory, it was only thanks to the efforts of the Classical school, representing the interests of industrial capitalism, that mercantilism was vanquished as a doctrine. Adam Smith is considered the founding father of the Classical school.
The first half of the 18th century was a transitional period in the history of the English economy. Although the crafts still partially retained their position, they had given way significantly to cottage industry There was also the more modest spread of the manufactory
Adam Smith can be called the economist of the manufactory period. The birth of large-scale industrial capitalism, in the form of manufactories based on the division of labour, had made it possible for Smith:
a) to conceive of the whole of society as a gigantic workshop with a division of labour (hence Smith’s doctrine on the division of labour);
b) to grasp the importance of industrial labour, together with that of commerce and agriculture (thanks to which Smith overcame the one-sidedness of both the mercantilists and the Physiocrats);
c) to conceive of the exchange between different branches of production as an exchange of equivalent products based on equal expenditures of labour (hence the central place that the theory of value occupies in Smith’s system);
d) to classify correctly the different forms of revenue (wages, profit, and rent) that go to each of the different social classes
Smith begins his work by describing the division of labour, which he sees as the best means for raising labour productivity. This view was itself a reflection of the conditions pertaining during the manufactory period, when there was still no widespread application of machinery and the basis of technical progress was above all the division of labour. Since Smith is mainly concerned with the material-technical advantages of the division of labour and not its social form, it is perfectly understandable that he should confuse the social division of labour between individual enterprises with the technical division of labour within the single enterprise. Despite this error, Smith’s doctrine on the division of labour is of enormous value. Proceeding from this, Smith conceives of the whole of society as a vast labouring society of people who work for one another and mutually exchange the products of their labour. The conception of society as at one and the same time a labouring and an exchange society of individuals allowed Smith to grasp the importance of industry and to accord central place to the labour theory of value.
Smith regarded society as a labouring society of individuals depending on one another by virtue of their productive activity. Unlike the mercantilists, he understood that the exchange of a commodity for money ultimately comes down to an exchange of the products of different producers’ labour. On the other hand, he overcame the one-sidedness of the Physiocrats, who regarded the movement of commodities as a movement of matter, or the material substance of nature, from the class of cultivators to the other classes of society (i.e., to the landowning and industrial classes). Beneath the exchange of products of labour Smith perceived an exchange of the labouring activities of different producers. If all producers depend on one another, this obviously does away with the privileged position that the mercantilists had accorded to foreign-trade and the Physiocrats, to agriculture. If industry depends upon agriculture, then the latter must depend upon industry to precisely the same extent. It is absurd to maintain that the farming population ‘maintains’ the industrial population which in and of itself is ‘sterile.’ Agriculture and industry are branches of production with equal status: exchange between them is an exchange of equivalents.
Having dispensed with the Physiocrats’ error regarding the interrelation between agriculture and industry. Smith was then able to come to a mote correct understanding of the productiveness of labour and capital. According to Smith, all labour is productive that yields value or surplus value, independently of whether it is applied to, agriculture or to industry (Smith vacillates in his definition: sometimes he defines productive labour as that which gives rise to surplus value, at other times as labour which embodies itself in material products possessing value).
Parallel to extending the concept of productive labour, Smith also expanded the concept of capital. During the mercantilist period what people called capital was usually a sum of money lent out at interest. The Physiocrats maintained that capital (they usually employed the term les avances) is not the actual money, but the products employed as means of production. On top of this they had in mind only that capital which is invested in agriculture and, in addition, looked upon capital primarily as a means for increasing the ‘net product’ (i.e., rent), Smith broadened the concept of capital and extended it equally to industry and commerce. Further, Smith linked the concept of capital closely to the concept of profit, viewing capital as profit-yielding property. By doing this he placed a ‘private-economic’ concept of capital as a means for extracting profit alongside the ‘national-economic’ concept of capital (in the sense of produced means of production) that we find with the Physiocrats.
Proceeding from his doctrine on the division of labour, Smith placed the theory of value in a new and central position. The Physiocrats, with their limited, naturalistic vantage point, had confused value with material substance. Smith accepted the ideas that we find already embryonically present among the mercantilists (especially in Petty) and developed the labour theory of value further. Smith’s train of thought goes approximately as follows: In a society founded upon the division of labour, each person produces products for other people and, by entering into exchange, receives those products that are necessary for his own subsistence. In acquiring the products of someone else’s labour our producer is really disposing over, or ‘commanding’ the labour of another. But how does out producer determine the value of the product that he himself has produced? By the quantity of other people’s labour which he can obtain in exchange for his own product, answers Smith. But how do we determine this quantity of labour? In a simple commodity economy this will equal the quantity of labour that our producer expends on producing his own product. Thus Smith sometimes correctly determines the value of a commodity by the labour expended on its production while at other times he determines it, mistakenly, by the labour which the commodity in question will purchase when exchanged. So long as Smith stays within the bounds of simple commodity economy, this conceptual confusion is of little harm, since these two quantities of labour will coincide. In capitalist economy, however, this coincidence disappears: the capitalist purchases the living labour of the worker (i e., labour power), for example, eight hours of his labour, in exchange for a product containing a smaller quantity of labour. Being unable to explain the laws of this exchange of capital for labour power, Smith mistakenly concludes that in capitalist economy the value of the product is greater than the quantity of labour expended on its production, and is equal to the sum that the capitalist has laid out to hire workers plus the average profit (in certain circumstances plus rent as well). Consequently, when it comes to capitalist economy Smith denies that the law of labour value operates: here he grounds himself on the vulgar theory of production costs Because of his vacillations on the theory of value Smith was to become the forbearer of the two currents within economic thought at the beginning of the 19th century: the Classical tendency, which achieved its highest expression; in Ricardo, and the vulgar current, represented by Say. The inconsistency of Smith’s theory of value impeded him from providing a fully worked out theory of distribution. It is true that he did make a major advance when compared to the Physiocrats. He replaced the Physiocrats’ false schema of social classes (landowning class, productive class, and sterile class) with a correct schema of landlords, industrial capitalists, and wage labourers He correctly enumerated the three forms of revenue that each of these classes receives: wages, profit, and rent. Smith especially deserves credit for having clearly distinguished the category of industrial profit, which the Physiocrats had ignored. For all the advances that Smith made in the theory of distribution, on the whole his treatment of the latter remained highly incomplete, partially because he did not hold to the standpoint of the labour theory of value, but abandoned it in favour of the theory of production costs. Had Smith held fast to the doctrine that the value of a product is created by human labour and is divided up between the separate social classes, the interdependence of the revenues of the various classes would have leapt to his eye and demanded elucidation, through a theory of distribution. But so long as Smith grounded himself on the theory of production costs, according to which the product’s value is the result of the sum of the various costs of production, or the revenue of those participating in production (wages, profit and rent), these revenues stood out as something prior to value and independent from one another Instead of regarding the product’s value as primary and revenue secondary, Smith looked upon value as a secondary magnitude deriving it from revenue But if this were the case, the question would immediately arise: how is the size of these revenues – i e , wages and profit – determined? Smith found no better answer to this question than to make a covert appeal to the theory of supply and demand. In his view the level of profits depends on the abundance of capital or, to be more precise, upon its rate of accumulation: when capital is growing rapidly the rate of profit falls; when a country’s total capital declines the rate of profit goes up. But a rise in capital indicates a simultaneous growth in the demand for labour power, and is thus accompanied by a rise in wages. The reverse” occurs when a country’s total capital is diminishing. Finally, when that capital is in a stationary state both wages and profits establish themselves at a low level. Thus, the movement of the revenues of both capitalists and workers depends upon whether a nation’s economy is in a progressive, stationary, or declining state. With such a position, Smith could hardly be said to have resolved the problem of distribution: he merely gave a factual description, accompanied by a superficial explanation of these facts in the spirit of supply and demand theory
It was left to the other great economist of the Classical school, David Ricardo, to make a decisive step forward in the theory of distribution.
4. David Ricardo (1772-1823) and the Principles of Political Economy and Taxation (1817)
David Ricardo’s life more or less coincides with the age of the English industrial revolution which, by extensively introducing new machinery and rapidly developing factory production, successfully displaced the previous forms of industry (the crafts, cottage industry, and manufactories). If Smith can be called the economist of the manufactory period then Ricardo is the economist of the age of the industrial revolution, the basic characteristics of which were to find their reflection in his theory. In his labour theory of value Ricardo generalized from the multifarious facts associated with the drastic and rapid cheapening of industrial manufactures which resulted from the introduction of new machinery and the rising technical productivity of labour. In his theory of distribution, and most notably in his doctrine on rent, he reflected the condition of sharpening class struggle between bourgeoisie and landlords that went side by side with the first successes of factory industry.
Ricardo’s primary merit is to have freed the labour theory of value of the internal contradictions from which it had suffered in Smith’s formulation of it, and to have attempted to use this theory to explain the phenomena of distribution
Smith had failed to make a sufficiently clear distinction between the quantity of labour expended on the production of a product, and the quantity of labour which that product will be able to purchase when exchanged In keeping with this dualistic standpoint. Smith acknowledged that a product’s value can change both as a result of changes in the productivity of the labour employed in producing it, and in consequence of alterations in the ‘value of labour’ (i.e., in the amount of wages or costs of production)
Ricardo took up arms against this error on the part of Smith. He demonstrated clearly that the quantity of labour that can be purchased in exchange for a given commodity cannot serve as an invariable measure of its value, and that to search for such an invariable measure is in general a hopeless undertaking Ricardo identifies a change in the quantity of labour expended on producing commodities as the sole source (with the exception of the cases noted below) of changes in their value. He therefore makes the magnitude of a commodity’s value depend directly on the development of the technical productivity of labour. By adhering consistently to this position Ricardo made a great contribution towards resolving the quantitative problem of value, although with his horizons limited (as were Smith’s) to capitalist economy he ignored the qualitative or social nature of value as the external expression of a determinate type of production relations between people
Smith had denied that the law of labour value operates within capitalist economy, where the product’s value does not go completely to its producer, but is broken down into wages and profit. To radically disprove this false view of Smith’s it would have been necessary to explain the laws by which capital exchanges for labour power. It would only have been possible to explain these laws by analysing those social relations of production which bind the worker to the capitalist. But the method of analysing production relations as being relations between people was as unknown to Ricardo as it was to Smith Ricardo, therefore, had no other recourse but to leave aside the question that Smith had posed. This he did, restricting his investigation on this point to the question of the ‘relative’ value of commodities. Insofar as it is a question of the ‘relative’ value of two commodities A and B, it is obvious that any change in workers’ wages (a rise, for example) which exerts a uniform influence on the overall production costs of the two commodities will not in the least affect their ‘relative’ value. The result of a rise in wages is not to increase the product’s value, as Smith had thought, but merely to lower the level of profits. No matter how the product’s value is distributed between wages and profit, this will not affect the magnitude of the product’s value, which in capitalist economy is determined by the quantity of labour necessary to produce it. By taking the position that wages and profit change reciprocally one to the other. Ricardo made a decisive stand for the view that profit is a portion of the product’s value which the workers have created with their labour and which the capitalist appropriates for himself.
Ricardo in this way rectified Smith’s mistake which consisted in denying that the law of labour value operates in capitalist economy. But he did not manage to show how the law of labour value, which does not manifest itself directly in the workings of capitalist economy , nevertheless regulates it indirectly through the medium of prices of production. Ricardo was not successful in explaining the apparent contradiction between the law of labour value and the observable phenomena of capitalist economy. In fact, Ricardo was able to eliminate the influence of wage fluctuations (and the corresponding fluctuations in the rate of profit) on the relative values of the two commodities, A and B, only insofar as wages have approximately the same weight in the costs of production of the two commodities, that is, to the extent that the two branches of production each employ capitals with identical organic compositions. If the capitals that produce commodities A and B have unequal organic compositions (or unequal turnover periods), any rise in wages (or fall in the rate of profit) will more perceptibly affect the commodity produced with the capital of lower organic composition, say, commodity A. In order to preserve the same level of profit in the two branches of production, the relative value of commodity A will have to rise in comparison with commodity B. Thus Ricardo arrives at his famous ‘exception’ to the law of labour value. The relative values of commodities A and B will change not only with fluctuations in the relative quantities of labour needed for their production, but also with a change in the rate of profit (or with a corresponding change in wages). Profit on capital is in effect an independent factor regulating the value of products together with labour.
By allowing for these ‘exceptions’ to the law of labour value Ricardo opened the way for the vulgar economists (Malthus, James Mill, McCuIloch, etc.) to completely abandon the labour theory of value. Ricardo himself, however, considered these ‘exceptions’ to be of secondary importance compared with the basic principle of labour value – his point of departure for constructing his whole theory of distribution.
Ricardo’s theory of distribution had two main objects to pursue: firstly, it had to flow from his theory of value and, secondly, it had to account for the real-life phenomena of distribution that Ricardo was observing in England at the beginning of the 19th century. The Smithian theory of distribution had led to a vulgar theory of production costs: the sum of wages, profit, and rent makes up the value of the commodity. We have already seen how Ricardo eliminated the contradiction between the actual existence of profit and the principle of labour value: he regards profit as the portion of the product’s value that remains after the deduction of wages (although Ricardo was inclined in his ‘exceptions’ to treat profit as an independent factor in value formation). Now Ricardo was faced with having to remove the contradiction between this same principle of labour value and the actual existence of rent, which at first view has the appearance of being added onto the commodity’s value. Insofar as it was a question of ‘differential’ rent, Ricardo managed to resolve the contradiction with supreme artistry. Rent arises because different tracts of land have differing productivities of labour. The value of a bushel of corn is determined by the quantity of labour necessary for its production on the most inferior lands under cultivation. The difference between this social value of corn and its individual value on plots of greater fertility (or on plots situated nearer to their market and thus incurring smaller outlays on transport) makes up the rent that is paid to the landlord. According to Ricardo, the very worst lands under cultivation yield no rent at all (a view which was mistaken, since it assumes that there is no such thing as absolute rent). As people move on to cultivate new, increasingly inferior lands, the value of a bushel of corn will rise. So, too, will ground rent, both in real terms in corn (since the difference in productivity between the best and worst lands will be growing), and even more so nominally, in terms of money (since the value of each bushel of corn will have risen).
By treating rent not as an addition to the social value of corn, but as the difference between this social value and the value of corn on the particular plot of land in question, Ricardo was able to make his theory of rent consistent with the principle of labour value .At the same time he attempted to derive from his theory of tent those logical conclusions that would conform to teal events. The age of England’s industrial revolution was characterized not only by the tremendous drop in the prices of industrial manufactures that came with .the introduction of new machinery, but also, together with this, by an enormous rise in the price of corn. This rise was in feet explainable by the country’s rapid industrialization, Napoleon’s continental blockade, and by the high duties on corn imports that had been put in place to benefit the English aristocracy. It was a temporary phenomenon, but Ricardo made it into a permanent law of capitalist economy. In his view, the growth of the population would make it increasingly necessary to transfer cultivation to worse and worse plots of land, which would be accompanied by rising corn prices and an upward trend in both real and nominal ground rent. All the advantages of the country’s industrialization would accrue to the landlord class. The workers would not share in any of the benefits because though their nominal wages would go up with the rise in corn prices, their real wages would at best remain stationary, i.e., at that minimum level of means of subsistence required by the worker and his family (what Lassalle was to term the ‘iron law of wages’). As for profit, this would exhibit a tendency towards an inexorable fall, thanks to the inevitable rise in nominal wages. The fall in profits would dampen the capitalists’ drive to accumulate capital, and the nation’s economic progress would inevitably slow down, coming neater and nearer to a total halt Ricardo’s entire portrait of revenue movements among the different social classes flows from his assumption that corn prices would be necessarily rising Ricardo underestimated the possibilities for a powerful growth in the productivity of agricultural labour. His doctrine of a necessary and inexorable rise in the price of corn was not borne out by events, and neither were the conclusions drawn from it. In spite of this, his theory of distribution represented an enormous scientific advance It portrayed the vast sweep of the movements in income of all the social classes, and their close interconnection; it depicted this dynamic as a necessary consequence of the law of labour value; and it clearly revealed the conflicts that exist between the interests of the individual classes.
5. The Disintegration of the Classical School
Ricardo had been courageous enough to acknowledge openly and directly the conflict of interests between capitalists and workers. As the struggle between these two classes flared up and pushed the struggle between capitalists and aristocracy into the background, bourgeois economists increasingly began to switch from a forthright description and explanation of capitalist economy to presenting a justification of it. Bourgeois political economy became increasingly apologetic (that is, it set itself the aim of justifying capitalism) and vulgar (i.e., it restricted its investigation to superficially studying phenomena as they might appear to the capitalist, instead of probing into the internal connection between them). Around about the 1830’s there began the period of the Classical school’s ‘disintegration’. Bourgeois economists of that period repudiated the labour theory of value developed by Smith and Ricardo. In order to show that profit is not a part of the value created by the workers’ labour, they concocted new theories as to its origin. The doctrine of Jean-Baptiste Say (1767-1832) was that profit is created because of the productiveness of the means of production belonging to the capitalist (the theory of the ‘productiveness of capital’); Nassau William Senior (1790-1864) saw profit as the reward for the ‘abstinence’ of the capitalist who accumulates capital by refraining from directly satisfying his own personal needs (the theory of ‘abstinence’). As bourgeois political economy became apologetic and vulgar, there also began to be opposition to it. Opposing it were the representatives of the landowning class, pushed into the background by the bourgeoisie (Thomas Robert Malthus, 1766-1834, who taught that only the existence of a wealthy class of landowners could create a market for industrial manufactures), the defenders of the petty bourgeoisie, peasantry, and handicrafts (Sismondi, 1773-1842, who argued that capitalism, by bringing ruin to the peasantry and handicrafts, reduces the purchasing power of the population and thereby creates the conditions for constant crises), and, finally, the first defenders of the working class (the utopian socialists).
End of A History Of Economic Thought by Isaak Illich Rubin