Classical vs. neoclassical economic thought in historical perspective: The interpretation of processes of economic growth and development

History of Political Thought

Volumn 21, Issue 3, 2000, Pages 524-542

  Lefeber, Louis ^a  

^a YORK UNIVERSITY   (Canada)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0039550229     PISSN: 0143781X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (49)

1. I hope that the discussion that follows can justify these claims, even though an exhaustive treatment of the subject would require a treatise of considerable length, including such topics as value theory. It would also involve considerable technical analysis. I owe a debt of gratitude to Professors Charles Kindleberger, John Buttrick, Ricardo Grinspun and David McNally for their insightful comments on the draft of this paper. I also am grateful for the valiant editorial help from another friend of Neal Wood, Rosalind Lefeber, my wife. The remaining errors are mine.
2. The terms 'marginalism' and 'marginalist' derive from the characterization of the conditions of optimum positions, such as profit or utility maximizing market solutions, in terms of small or marginal deviations from them.
3. See, e.g., P.A. Samuelson, 'How Foundations Came To Be', Journal of Economic Literature, XXXVI (1998), pp. 1375-86.
4. For example, the works of Kenneth Arrow, Amartya Sen or Stephen Marglin represent exceptions, in the sense that their analyses are explicitly concerned with the clarification or solution of social and political problems. At the same time, while their works have been recognized for their significance - including Nobel prizes for the first two - they are not representative of what would generally come under the heading of mainstream economics, as defined, for example, by the table of contents of introductory textbooks.
5. Universal applicability of an economic theory was rejected by Ferdinando Galiani, student of Vico and contemporay of Adam Smith, in his critique of the physiocratic system of production. His argument is as valid today as it was in his time.
6. I use the word 'claim' advisedly, because neoclassical economics is not value free in any basic sense of the term. Consider, for example, the idea of efficiency. Is it necessarily desirable to have more of a good, even if it can be obtained without diminishing the output of some other good, as demanded by Pareto optimality? Or is the requirement of being 'on the firm's cost curve' desirable to the exclusion of some expenditure that benefits workers, even if it does not contribute to enhanced profitability? Clearly, these are value judgments of the first order.
7. Some elements of the moral philosophy of Adam Smith in his The Theory of Moral Sentiments (Oxford, 1976), can be traced back to Sir Thomas Smith (1513-77). See Neal Wood, 'Foundations of Political Economy: The New Moral Philosophy of Sir Thomas Smith', in Political Thought and the Tudor Commonwealth: Deep Structure, Discourse and Disguise, ed. P.A. Fideler and T.F. Meyer (London and New York, 1992), pp. 140-68.
8. Some elements of the moral philosophy of Adam Smith in his The Theory of Moral Sentiments (Oxford, 1976), can be traced back to Sir Thomas Smith (1513-77). See Neal Wood, 'Foundations of Political Economy: The New Moral Philosophy of Sir Thomas Smith', in Political Thought and the Tudor Commonwealth: Deep Structure, Discourse and Disguise, ed. P.A. Fideler and T.F. Meyer (London and New York, 1992), pp. 140-68.
9. Even though this paper makes references to particular classical and neoclassical economists and their contributions, it is not an essay in the history of thought. The evolution of ideas is clearly detailed in Joseph A. Schumpeter's magisterial History of Economic Analysis (New York, 1954). See also T. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662-1776 (Oxford, 1988), with its valuable chronological table of works from 1660 to 1776; D. McNally, Political Economy and the Rise of Capitalism: A Reinterpretation (Berkeley, 1988); R.L. Meek, Studies in the Labour Theory of Value (New York, 1975). There is an extensive set of bibliographical notes in H.W. Spiegel, The Growth of Economic Thought (Durham NC, and London, 3rd edn., 1991).
10. Even though this paper makes references to particular classical and neoclassical economists and their contributions, it is not an essay in the history of thought. The evolution of ideas is clearly detailed in Joseph A. Schumpeter's magisterial History of Economic Analysis (New York, 1954). See also T. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662-1776 (Oxford, 1988), with its valuable chronological table of works from 1660 to 1776; D. McNally, Political Economy and the Rise of Capitalism: A Reinterpretation (Berkeley, 1988); R.L. Meek, Studies in the Labour Theory of Value (New York, 1975). There is an extensive set of bibliographical notes in H.W. Spiegel, The Growth of Economic Thought (Durham NC, and London, 3rd edn., 1991).
11. Even though this paper makes references to particular classical and neoclassical economists and their contributions, it is not an essay in the history of thought. The evolution of ideas is clearly detailed in Joseph A. Schumpeter's magisterial History of Economic Analysis (New York, 1954). See also T. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662-1776 (Oxford, 1988), with its valuable chronological table of works from 1660 to 1776; D. McNally, Political Economy and the Rise of Capitalism: A Reinterpretation (Berkeley, 1988); R.L. Meek, Studies in the Labour Theory of Value (New York, 1975). There is an extensive set of bibliographical notes in H.W. Spiegel, The Growth of Economic Thought (Durham NC, and London, 3rd edn., 1991).
12. Even though this paper makes references to particular classical and neoclassical economists and their contributions, it is not an essay in the history of thought. The evolution of ideas is clearly detailed in Joseph A. Schumpeter's magisterial History of Economic Analysis (New York, 1954). See also T. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662-1776 (Oxford, 1988), with its valuable chronological table of works from 1660 to 1776; D. McNally, Political Economy and the Rise of Capitalism: A Reinterpretation (Berkeley, 1988); R.L. Meek, Studies in the Labour Theory of Value (New York, 1975). There is an extensive set of bibliographical notes in H.W. Spiegel, The Growth of Economic Thought (Durham NC, and London, 3rd edn., 1991).
13. Even though this paper makes references to particular classical and neoclassical economists and their contributions, it is not an essay in the history of thought. The evolution of ideas is clearly detailed in Joseph A. Schumpeter's magisterial History of Economic Analysis (New York, 1954). See also T. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662-1776 (Oxford, 1988), with its valuable chronological table of works from 1660 to 1776; D. McNally, Political Economy and the Rise of Capitalism: A Reinterpretation (Berkeley, 1988); R.L. Meek, Studies in the Labour Theory of Value (New York, 1975). There is an extensive set of bibliographical notes in H.W. Spiegel, The Growth of Economic Thought (Durham NC, and London, 3rd edn., 1991).
14. This point needs clarification. Western practitioners of neoclassicism implicitly take the existence of capitalist institutions and the ethos of private enterprise for granted. Government, as an institution of the state, is an exogenous entity to be invoked in connection with taxation and as a provider of public goods and services. But with a different concept of the state or set of institutions, neoclassical economic theory can also be employed as a planning tool for centrally controlled economies.
15. Goethe, a strong critic of the French Revolution, participated in the 1793 campaign against revolutionary Mainz and was a lifelong admirer of Napoleon. K.O. Conrady provides the original source of the quotation in his Goethe: Leben und Werk (Frankfurt am Main, 1988), Vol. II, p. 79, but argues that it has been misinterpreted.
16. J.H. von Thünen's rent maximizing land use theory (1826) and A. Cournot's profit maximizing firm and demand theory (1838) are early examples of the new directions in economic thought. Gossen ( 1854), Jevons and Menger (1871) first formalized subjective theories of value and marginal utility theory. See references in note 9.
17. A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Chicago, 1976), Book IV, p. 449.
18. Traditional landowners were assumed to be conspicuous consumers and spendthrifts. The contrast between the wastrel traditional (as opposed to the commercial) landowner and the frugal entrepreneur who saves and invests was a recurring theme in the writings of Smith, Ricardo and others. Workers, subsisting on wages just high enough to maintain themselves, were assumed not to have the capacity to save.
19. Smith, Wealth of Nations, Book V, p. 399.
20. This view, most forcefully argued by Malthus, justified for him the repeal of poor relief; it was equally forcefully rejected by Marx.
21. The contemporary popular image of Smith as an advocate and defender of untrammelled capitalism is a misrepresentation invented by free market ideologues. They read selectively and out of context Smith's arguments in favour of the market without his qualifications for market shortcomings, monopolization and other unfair practices. It is interesting to note that the Pelican (1970) and the Penguin (1974) editions of the Wealth of Nations reprint only the first three of the five books making up the great work, that is, those three that deal primarily with the potential benefits from competitive market organization. Books Four and Five, which deal with political economy, that is, government, taxation, institutions, public works, shortcomings of regulated companies and various limitations of the markets, including a theory of workers' alienation and the need for public education, are excluded without any reference to this omission.
22. Actually Smith and Ricardo recognized the right to rent but, it being a deduction from surplus, deplored its use for consumption by 'wastrel' landowners. Ricardo, himself a landowner, went so far as to suggest the exclusion of landlords from receiving compensation which parliament at one point considered for indemnifying persons adversely affected by some proposed legislation. As to the question of poverty and unemployment, even Petty - believer in a backward bending labour supply - argued that the poor are not responsible for their miserable state. In fact, he suggested something akin to a negative income tax in the form of 'a regular allowance by public tax' to all who would live on charity or crime. The purpose was partly to provide an alternative to subsistence by criminal means and partly to contribute to domestic prosperity that was considered beneficial to trade.
23. R.M. Solow, 'A Contribution to the Theory of Economic Growth', Quarterly Journal of Economics, LXX (1956), pp. 65-94. The theory is a response to one developed independently by Roy Harrod and Evsie Domar, which assumes fixed capital:output and capital:labour ratios. With labour in surplus the growth rate of the output is uniquely determined by the rate of capital accumulation and wages would have to be at subsistence. Apart from the absence of the land constraint, the Harrod/Domar model is similar to the classical concept of growth. (See any intermediate text in maroeconomic theory, e.g. W.H. Branson, Macroeconomic Theory and Policy (New York, 3rd edn., 1989).)
24. R.M. Solow, 'A Contribution to the Theory of Economic Growth', Quarterly Journal of Economics, LXX (1956), pp. 65-94. The theory is a response to one developed independently by Roy Harrod and Evsie Domar, which assumes fixed capital:output and capital:labour ratios. With labour in surplus the growth rate of the output is uniquely determined by the rate of capital accumulation and wages would have to be at subsistence. Apart from the absence of the land constraint, the Harrod/Domar model is similar to the classical concept of growth. (See any intermediate text in maroeconomic theory, e.g. W.H. Branson, Macroeconomic Theory and Policy (New York, 3rd edn., 1989).)
25. See R.M. Solow, 'Technical Change and the Aggregate Production Function', Review of Economics and Statistics, XXXIX (1957), pp. 312-20.
26. But not for Malthus, who overlooked it in his population essay.
27. 'By means of it [that is, trade], the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being earned to highest perfection.' Smith, Wealth of Nations, Book IV, p. 469.
28. See S. Hollander, The Economics of David Ricardo (Toronto, 1979), Ch. 7.
29. The law was challenged by Malthus who in his correspondence with Ricardo argued that there may not necessarily be adequate demand for the absorption of the output of productive labour. As perhaps the first, but not the last instance in economics where logic defeated common sense, Ricardo, being a better logician, prevailed. The argument which is not without technical complexities, is presented in a readily accessible form in J.M. Keynes, Essays in Biography (New York, 1951), pp. 116-23.
30. In addition to the mathematical conditions for maximization, the solution requires pure competition, that is, absence of monopoly, scale economies and so-called 'externalities'. The latter are non-market by-products of production processes that have positive or negative effects on the profitability of other producers. They can take various forms, including those that work through institutions. For a general treatment see A. Papandreou, Externalities and Institutions (Oxford, 1994).
31. Adam Smith differentiated between what he called absolute demand for something a person may like to have, and effectual demand, by which he meant the willingness to pay the 'natural' price for the desired good. He defined the 'natural' prices as the price that covers the value of profit, rent and wages that must be paid to call forth its supply.
32. One of the Rothschilds quipped around the middle of the nineteenth century: 'There are three ways of losing money, women, gambling and engineers. The first two are pleasanter, but the last is much the most certain.' Cited by C.P. Kindleberger, Economic Growth in France and Britain (Cambridge MA, 1964), p. 158. J.M. Keynes in A Treatise on Probability (New York, 1962), argued that there are no rational bases for investment decisions. In his General Theory of Employment, Interest and Income (San Diego, 1964), he posited that investors are motivated by 'animal spirits'.
33. One of the Rothschilds quipped around the middle of the nineteenth century: 'There are three ways of losing money, women, gambling and engineers. The first two are pleasanter, but the last is much the most certain.' Cited by C.P. Kindleberger, Economic Growth in France and Britain (Cambridge MA, 1964), p. 158. J.M. Keynes in A Treatise on Probability (New York, 1962), argued that there are no rational bases for investment decisions. In his General Theory of Employment, Interest and Income (San Diego, 1964), he posited that investors are motivated by 'animal spirits'.
34. One of the Rothschilds quipped around the middle of the nineteenth century: 'There are three ways of losing money, women, gambling and engineers. The first two are pleasanter, but the last is much the most certain.' Cited by C.P. Kindleberger, Economic Growth in France and Britain (Cambridge MA, 1964), p. 158. J.M. Keynes in A Treatise on Probability (New York, 1962), argued that there are no rational bases for investment decisions. In his General Theory of Employment, Interest and Income (San Diego, 1964), he posited that investors are motivated by 'animal spirits'.
35. W.H. McNeill, 'How the West Won', review of D.S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (New York, 1998), in The New York Review of Books, XLV, no. 7 (23 April 1998), pp. 37-9. The oversight is remarkable since a late mercantilist, Sir James Stuart, had previously commented on the favourable effects on employment and prosperity of public expenditures on 'warlike stores'.
36. W.H. McNeill, 'How the West Won', review of D.S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (New York, 1998), in The New York Review of Books, XLV, no. 7 (23 April 1998), pp. 37-9. The oversight is remarkable since a late mercantilist, Sir James Stuart, had previously commented on the favourable effects on employment and prosperity of public expenditures on 'warlike stores'.
37. I discuss this in Louis Lefeber, 'On the Paradigm of Economic Development', World Development, II (1974), pp. 1-8.
38. See E.J. Hobsbawm, Industry and Empire: An Economic History of Britain since 1750 (London, 1968). For example, the European population of the future USA grew from about 300,000 in 1701 to nearly 4 million by 1790. This was due to immigration as well as natural population growth. By the 1830s about a third of the European population had emigrated overseas. See also Lefeber, 'On the Paradigm of Economic Development'. See K.H. O'Rourke and J. Williamson, Globalization and History: The Evolution of the Nineteenth-Century Atlantic Economy (Cambridge MA, 1999), which gives detailed treatment to migration. (I owe this reference to C.P. Kindleberger.)
39. See E.J. Hobsbawm, Industry and Empire: An Economic History of Britain since 1750 (London, 1968). For example, the European population of the future USA grew from about 300,000 in 1701 to nearly 4 million by 1790. This was due to immigration as well as natural population growth. By the 1830s about a third of the European population had emigrated overseas. See also Lefeber, 'On the Paradigm of Economic Development'. See K.H. O'Rourke and J. Williamson, Globalization and History: The Evolution of the Nineteenth-Century Atlantic Economy (Cambridge MA, 1999), which gives detailed treatment to migration. (I owe this reference to C.P. Kindleberger.)
40. See E.J. Hobsbawm, Industry and Empire: An Economic History of Britain since 1750 (London, 1968). For example, the European population of the future USA grew from about 300,000 in 1701 to nearly 4 million by 1790. This was due to immigration as well as natural population growth. By the 1830s about a third of the European population had emigrated overseas. See also Lefeber, 'On the Paradigm of Economic Development'. See K.H. O'Rourke and J. Williamson, Globalization and History: The Evolution of the Nineteenth-Century Atlantic Economy (Cambridge MA, 1999), which gives detailed treatment to migration. (I owe this reference to C.P. Kindleberger.)
41. S. Kuznets in his 'Economic Growth and Income Inequality', American Economic Review XLV (1955) pp. 1-28, and 'Quantitative Aspects of the Economic Growth of Nations', Economic Development and Cultural Change, XI (1963), pp. 1-80, found that historically income distributions worsened in the initial periods of development. This may be more indicative of capitalist economic organization than an inherent future of growth and development. The mercantilists, being pragmatists, recognized the importance of workers' purchasing power for domestic trade and prosperity, even though their ideas about wage levels were far from being as generous as those of Adam Smith. The contemporary cases of Japan, South Korea and Taiwan indicate that the massive post-war income redistribution combined with government controls of trade and investment was instrumental in motivating growth through the creation of domestic markets.
42. S. Kuznets in his 'Economic Growth and Income Inequality', American Economic Review XLV (1955) pp. 1-28, and 'Quantitative Aspects of the Economic Growth of Nations', Economic Development and Cultural Change, XI (1963), pp. 1-80, found that historically income distributions worsened in the initial periods of development. This may be more indicative of capitalist economic organization than an inherent future of growth and development. The mercantilists, being pragmatists, recognized the importance of workers' purchasing power for domestic trade and prosperity, even though their ideas about wage levels were far from being as generous as those of Adam Smith. The contemporary cases of Japan, South Korea and Taiwan indicate that the massive post-war income redistribution combined with government controls of trade and investment was instrumental in motivating growth through the creation of domestic markets.
43. The discount of the future has a special significance for natural resource preservation Social risks are lower than those of individuals. Furthermore, society's life expectancy is of long or indefinite duration, as opposed to the limited time horizon of individuals. On both counts the discount of the future for social decisions has to be, if not zero, considerably lower than for private investors. It follows that society can and should undertake projects that individual investors cannot or would not want to implement.
44. For current purposes the statistical method is irrelevant, even though it is useful to keep in mind that it excludes the jobless who for whatever reason, frustration or otherwise, fail to look for employment within some arbitrarily stipulated time period. For various analytical definitions of employment and unemployment see A.K., Sen, Employment, Technology and Development (Oxford, 1975).
45. Only taxes that are unrelated to effort would qualify under this heading. Such are head taxes, which - apart from Mrs Thatcher's housing tax - were used effectively only in the US South for keeping minorities and the poor from the voting box.
46. Smith argued that liberal wages encouraged industry and hence profitability. As to induced price increases he claimed that high profits contributed more to high prices than did high wages.
47. Contrary to popular perception, the classical were in favour of government intervention in the markets for controlling unfair practices, including monopolization. They were, however, against that kind of symbiotic relationship with private enterprise in which government was grantor and protector of monopolies in the mercantile tradition. See note 17.
48. The concept of competition - in contrast to its popular interpretation as rivalry among producers or merchants - means that no individual person or enterprise has the power to set or affect market prices or influence each other's behaviour. Competitors -as opposed to rivals - make their decisions based on prices that are in turn determined by the totality of the responses by large numbers of independently acting small scale market participants.
49. See, for example, the article by J. Cassidy, 'The Return of Karl Marx', The New Yorker, LXXIII (20, 27 October 1997), pp. 249-59, called to my attention by Professor Neal Wood. But there are recurring critiques of the direction taken by the capitalist system by George Soros and other members of the financial establishment.