The concept of a ‘classical economics is not so simple. The notion was invented by Marx, who explained it as beginning with Sir William Petty in England and Pierre le Pesant de Boisguilbert in France, and ending with David Ricardo and J.
-C.-L. Simonde de Sismondi (Marx 1970:52). Since Petty’s works date from some forty years prior to those of Boisguilbert, this entails that Petty is the founder of classical political economy—and indeed, Marx (1970:53-4) comments that Petty’s ‘political arithmetic [is] the first form in which political economy is treated as a separate science’, further describing him as ‘the Father of Political Economy as such’ (Marx 1967: vol.
I, 272-3).The Physiocrats are pinpointed as providing the first systematic analysis of distinctively capitalist production:‘It is this service that makes them the true fathers of modern political economy’ (Marx 1967: vol. II, 360; vol. III, 784).
The range of political economy was first comprehensively established by Smith—although both for scientific and vulgar political economy (Marx 1968:165-6); and ‘Ricardo…gave to classical political economy its final shape’ (Marx 1970:61).
James Mill is the beginning of its end and the dissolution of the Ricardian system is ‘the twilight of classical economy …its very death-bed’ (Marx 1967: vol. III, 786).The fate of the initiative of a classical economics in the century following Marx’s formulation is bound up with the emergence of marginality theory as the dominant approach to economics—and particularly, the eventually emerging view that marginalism is the natural and lawful heir of classical theory and, therefore, properly describable as neoclassical.
Notwithstanding changes and differences in the meaning attributed to classical political economy, there has endured quite considerable agreement as to who the classical economists are.In the contemporary literature Smith and Ricardo remain the central figures of the classical tradition. Though, there has been little interest in categorizing Marx’s pre-modern classical economists in the classical school—even amongst those fundamentally sympathetic to Marx’s conception of classical economics, though there is facts of change in this respect (Roncaglia 1985:90-1; Bharadwaj 1978a, 10-11).Further, Quesnay’s status in relation to the classical school is at least indefinite in the modern literature and J.
S. Mill now usually finds a place in the tradition, a view with which Marx would have been at odds. Surely the classification which places Smith, Ricardo and J. S.
Mill at the centre of classical political economy is the most frequent and widely accepted one.This view seems to have originated with James Bonar’s entry in Palgrave’s Dictionary of Political Economy (1894: vol. I, 303) and Cannan’s important History (1893), consequently being utilized by many modern writers. If there is a substantive unity underlying this contemporary conception of classical economics, it is not overall clear what it is—rather, this notion appears to be simply a classificatory device.
However, to the degree that the modern classification is linked with adherents of marginalist economics, there is usually a conception of classical economics—articulated to varying degrees—as a collection of more or less imperfect anticipations of demand and supply theories. Conceivably an implicitly ‘minimal’ definition also operates, in terms of the classical epoch instituting the formal agenda or scope of economic science—production, distribution, value, accretion and so on.This presupposes that classicism is not prehistoric marginalism. Accepting this for the moment for the sake of argument, even if one were to presume that the history of classical/surplus theories was the history of a great error—an error corrected by the different and ultimately dominant points of departure severally taken by the marginalist founders—this would give no explanation (or justification) for distorting the history of classical economics, though it might explicate a certain later lack of interest in classical economics.
As early as the Economic and Philosophic Manuscripts of 1844, Marx applies his concept of division to a critical review of the “classical” economics extensively accepted in the first half of the nineteenth century, which was taught and practiced by Adam Smith, David Ricardo, and John Stuart Mill.”Modern” political economy, according to Marx, accepts the interrelationship of the division of labor and the accumulation of wealth. The division of labor is necessary for the accumulation of wealth. Private property “left to itself [freed from medieval restrictions on use and sale] can produce the most useful and comprehensive division of labor.
” Smith argues that “division of labor bestows on labor infinite production capacity . . . which stems from the propensity to exchange and barter, a specific human propensity.
“Marx denies these anthropomorphic propensities. “The motive in exchange is not humanity but egotism.” (Marx, Economic and Philosophic Manuscripts of 1844, 133)The development of extremely specialized human beings is not the cause but the effect of the division of labor. The range of talent is made useful simply in a system where exchange exists.
The division of labor goes forward restricted by the extent of exchange, by the scope of the market.”In advanced conditions, every man is a merchant, and society is a commercial society.” (Marx, Economic and Philosophic Manuscripts of 1844, 89)The division of labor and exchange are “noticeably alienated expressions of human activity.” To state that the division of labor and exchange is dependent on private property is to say that labor is the core of private property.
The fact that the division of labor and exchange are creatures of private property shows that human life requires private property for its recognition and that human life these days needs the supremacy of private property. Marx is saying that the estranged form requires the institution of private property. Therefore, to remove alienation, private property should also disappear.Marx has much more to say about the significance of private property in the issue of alienation.
The alienated worker works not for himself or herself but for the capitalist “or whatever one chooses to call the master of labor. Private property is therefore the product, the result, the necessary outcome, of alienated labor, of the external relation of the worker to nature (land) and to himself.” Private property is not the basis of alienated labor; it is the con- sequence. If the root cause of distancing is the division of labor, private property is its symptom.
Marx’s decisive solution to alienation is to eliminate the division of labor and, by inference, private property.The relationship of labor to capital is this: Capital is stored-up living labor. The worker is living capital “and as a result a capital with needs.” Capital, while not working, loses its interest (earns no interest) and therefore its livelihood.
The value of the worker, as capital, fluctuates with demand and supply like a commodity. The worker’s life is looked upon as a commodity. The worker’s human qualities subsist only as they “exist for capital alien to him.” The worker produces capital, and capital produces the worker.
The worker is no longer a human being but is a product that “can go and bury him, starve to death, etc.”The worker is desired, so he must be maintained while be is working, to avert the race of laborers from dying out. Maintaining the worker has the same implication as maintaining a piece of equipment, similar to “oil which is applied to the wheels to keep them turning.” English political economists David Ricardo and James Mill could show with an obvious sense of logic that what was significant was that wages and interest was competitors for income.
Squeezing money from the consumer was never the issue, but gripping money from one another was the normal relationship. The capitalist could gain simply at the expense of labor. National income was made of two parts, interest and wages. If workers profited by high wages, capitalists suffered.
According to the analysis of political economists, production was a distant activity.A human being was an abstract essence, “a mere workman”–an “input,” we would say–to be used or dispensed with according to the needs of the economy. Worker as human being has no place in the analysis of political economists.Another great foundation stone of English political economy was the development of the concept of differential rent.
The difference in earnings acquiesced by the least productive land and the best is called rent. Rent has taken on the same characteristics as interest on capital. The landowner is a capitalist, the renter farmer the worker. The tenant farmer stands in relation to landlord as worker to capitalist.
Landlord and capitalist are at odds with each other, each trying to gain legitimacy in the eyes of society (Marx, Economic and Philosophic Manuscripts of 1844, 89). Through the growth of industrialism and the increasing power of the manufacturing class, nineteenth-century political economists took sides with the emerging class against landlords.The Marxian approach to poverty integrated structures of power, class relations, and exploitation which classical economics could not or did not desire to accommodate. And many of the weaknesses he exposed have still not been addressed in the current day.
Though imprecise, the technical differences between classical political economy and neoclassical economics-the latter established marginal analysis and placed a greater emphasis on supply and demand than labor in the grit of value-carry less weight, at least in a study on Marx, than what they share in common: a faith in the self-regulating free market, and economic reasoning based on the preferences of individual agents rather than societal pressures or group dynamics.It was Marx’s strife that classical economics, as inaugurated by Smith and Ricardo, was trapped in a romantic eighteenth-century idea of the natural individual, the isolated hunter/gatherer who reaps as much as he sows. To this day, modern economic textbooks still adopt this Smithian idea of great liberty-the assumption that employer and employee are free agents on a level playing field who confer a price for that labor, the wage. In this view, the wage, like the value of any commodity, depends not simply on the objective laws of supply and demand, but also on the amount of labor invested to obtain these skills.
Thus, different skill levels will command diverse values on the labor market. Professions that demand large and long investments in education, such as medicine or law, will rule higher wages than professions that do not. In this sense, education becomes a form of capital (Gary Becker, 1993).Generally, classical economics assumes that individuals, like firms, think in free-market terms, that they make independent choices based on their preferences and a calculated assessment of the costs or benefits of these choices.
Yet, beyond such indubitable logic lie a number of ambiguities relating to the determination of value. For example, one accepted microeconomics textbook used in the United States declares matter-of-factly that “one reason why teacher’s salaries are so low relative to those of many other college graduates is that teaching jobs have few dangers and offer long vacations.” (S. Fischer, R.
Dornbusch, and R. Schmalensee, 1988, p. 287).Setting aside the fact that most jobs for college graduates have few dangers, there are a number of jobs with long vacations such as professional athletics which pay far higher salaries.
Likewise, there are many professions for college graduates which involve far less preparation than teaching, such as stock broking or real estate, that offer far higher renumeration. On the contrary, there are dangerous jobs, such as a foot soldier in the army, that offer little financial reward, often even less than teaching.For Marx, capitalism was full of such mystifications in which the market values of commodities hid fundamental structures of power, hype, expectation, or any number of elusive determinants which are often divorced from the value of the labor invested in it. He exposed what lay behind this façade of harmonious agents negotiating in the marketplace, and how capitalism with classical economics disguised unequal bargaining positions between employer and employee based on socially-determined power structures.
“The size of wages,” Marx wrote,is determined at the beginning by free arrangement between the free worker and the free capitalist. Later it turns out that the worker is compelled to allow the capitalist to determine it, just as the capitalist is compelled to fix it as low as possible. Freedom of the contracting parties has been supplanted by compulsion. (K.
Marx, 1975, p. 33).By disguising inequalities of leverage behind an apparently harmonious movement of agents toward equilibrium, classical economics rightly merits the label of “an apologetic ideology,” (P. Sweezy, 1972, p.
54) in that it throws a cloak of equality over unequal bargaining positions between labor and capital in the marketplace.Such a veil lies evenly over more modern economic advances such as equilibrium theory, developed by Kenneth Arrow in the 1950s, which tries to explicate market behavior on the basis of complex mathematical models, but eventually can only do so by making unrealistic assumptions: that rational agents on the marketplace operate in a framework of perfect information and perfect competition.In short, classical economics is an apologia for capitalism not inevitably in the strong sense of a discipline indebted to corporate or upper-class interests, but in the weaker sense that its paradigms can merely not accommodate the web of unequal relationships, unequal bargaining positions, and unequal levels of skill that say economic decision-making in the real world.Whatever weaknesses Marx can have had as a classical political economist, this rather simple discovery-that economic relations are based on mystifying determinants of value and varying degrees of leverage in the marketplace, both of which mainstream economics cannot accommodate-still has prevalent application.
And the more that a particular framework deviates from the standard assumptions of mainstream economics-a pure unregulated market, perfect competition, institutional neutrality, legal transparency-the more marked these mysterious determinants of value become.Today, such determinants are predominantly acute in developing countries where entrenched power structures state the distribution of wealth, in countries with an abundant supply of cheap labor, in short, in countries whose conditions are related to those that gave rise to Marx’s critique in the first place.Moreover, it is certainly true that the Marxian exploitation theory is basically the product of major errors in classical economics, mainly, in the writings of Adam Smith. The relationship between classical economics and the exploitation theory represents a tangle of satire and tragedy.
One irony is that while different errors and confusions in classical economics truly did contribute to the exploitation theory, the most basic and important of these errors and confusions have gone ignored and unidentified. These are the errors and confusions pertaining to the theoretical framework of the exploitation theory, which assumes that all income due to the performance of labor is wages as well as that profits are a deduction from what, are of course wages. They have gone unnoticed and unidentified as the validity of this framework is taken for granted–as being factually unexceptionable and therefore unobjectionable.It is assumed to be correct by the opponents of Marx as much as by Marx; this includes Böhm-Bawerk, the foremost critic of the exploitation theory, A second and greater irony is that the foundation for demolishing both the conceptual framework of the exploitation theory and later the whole of the explicit substance of the exploitation theory, is provided specifically by essential elements of classical economics.
That is, classical economics makes it probable to understand such propositions as why profits, not wages, are the original and primary form of income and that precisely because of the work of businessmen and capitalists, wages can rise out of all connection with minimum subsistence–literally without limit.The tragedy of the association between classical economics and the exploitation theory has not only been that errors and confusions in classical economics have supported the exploitation theory and thus the assault on capitalism and advancement of the cause of socialism. That would have been bad enough. The further tragedy and irony has been that as this support was perceived as necessary and inescapable as based on the vital nature of classical economics–the opponents of the exploitation theory–that is, the defenders of capitalism from the late nineteenth century on, who had the most to gain from the knowledge given by classical economics–felt obliged to discard practically the whole of it insofar as it could not directly be validated on the basis of the neoclassical principle of diminishing marginal utility, or otherwise autonomously of classical economics’ basic framework.
Thus, along with “the labor theory of value” and the “iron law of wages,” they discarded such further features of classical economics as the wages-fund doctrine and its outcome that savings and capital are the source of almost all spending in the economic system. The wages-fund policy held that at any given time there is a determinate total expenditure of funds for the payment of wages in the economic system, and that the wages of the employees of business firms are paid by businessmen and capitalists, out of capital, which is the consequence of saving; not by consumers in the purchase of consumers’ goods.Two generations later, the desertion of the wages-fund doctrine and with it, classical economics’ perspective on saving and capital, made probable the acceptance of Keynesianism and the policy of inflation, deficits, and ever growing government spending. On the contrary paradoxical fashion, and with just about the same time lag, the abandonment of the classical principle that cost of production, rather than supply and demand, is the direct (though not the ultimate) determinant of the prices of most manufactured or processed goods led to the promulgation of the doctrines of “pure and perfect competition,” “oligopoly,” “monopolistic competition,” and “administered prices,” with their implied call for a policy of radical antitrust or outright nationalizations to “curb the abuses of big business.
“Thus, along these two further paths, the errors of classical economics in support of the exploitation theory have served in the assault on capitalism and to precede the cause of socialism. But this time, it was with the implied support of those who had abandoned classical economics because of its service in the progression of socialism, and who now, specifically because of that abandonment, were themselves making possible the advancement of socialism, however much they may have believed themselves to be incompetent of acting in such a destructive way.Indeed, so strong has been the conviction on the part of the defenders of capitalism that classical economics is permeated with support for Marxism, that even to suggest such a classical doctrine as that cost of production can be a direct determinant of price, is to encourages one’s own censure for allegedly being sympathetic to Marxism–as well as for allegedly being ignorant of all that economics has taught on the subject of prices since 1870. Not surprisingly, in the great majority of cases, this antagonism to classical economics on the part of the defenders of capitalism has kept them from any serious study of it.
According to Reisman:Classical economics itself provides the basis for demonstrating the enormous errors in the conceptual framework of the exploitation theory. Classical economics implies that it is false to claim that wages are the original form of income and that profits are a deduction from wages. This becomes apparent as soon as we define our terms along classical lines:”Profit” is the excess of receipts from the sale of products over the money costs of producing them–over, it must be repeated, the money costs of producing them.A “capitalist” is one who buys in order subsequently to sell for a profit.
(A capitalist is one who makes productive expenditures.)”Wages” are money paid in exchange for the performance of labor–not for the products of labor, but for the performance of labor itself.http://www.mises.
org/story/1729On the basis of these definitions, it follows that if there are merely workers producing and selling their products, the money which they receive in the sale of their products is not wages. “Demand for commodities,” to quote John Stuart Mill, “is not demand for labor.” (1976)“In buying commodities, one does not pay wages, and in selling commodities, one does not receive wages. What one pays and receives in the purchase and sale of commodities is not wages but product sales revenues”.
(Reisman 1996)Thus, in the pre-capitalist economy imagined by Smith and Marx, all income recipients in the process of production are workers. But the incomes of those workers are not wages. They are, in fact, profits. Indeed, all income earned in producing products for sale in the pre-capitalist economy is profit or “surplus-value”; no income earned in producing products for sale in such an economy is wages.
For not only do the workers of a pre-capitalist economy earn product sales revenues rather than wages, but also those workers have zero money costs of production to deduct from those sales revenues.http://www.mises.org/story/1729They have zero money costs precisely because they have not acted as capitalists.
They have not bought anything in order to make possible their sales revenues, and thus they have no prior outlays of money to deduct as costs from their sales revenues. Having made no productive expenditures, they have no money costs.Thus, doctrines of classical economics, which usually bear the weight of the accusation that it supports the exploitation theory–namely, the labor theory of value and the “iron law of wages.” For after laying down the conceptual framework he has borrowed from Adam Smith, it is these two doctrines that Marx applies to explain the extent of the alleged deduction of profits from wages.
Usually, Marx uses the term “surplus-value” in place of profits, as a catchall for all incomes other than wages. References: Bharadwaj, K. (1978a) Classical Political Economy and Rise to Dominance of Supply and Demand Theories, New Delhi: Orient Longman.Cannan, E.
(1893) A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848, 3rd edn, 1917; London: P. S. King (1924 reprint).Gary Becker, Human Capital, Chicago, University of Chicago Press, 1993.
John Stuart Mill, Principles of Political Economy, Ashley ed. (1909; reprint ed., Fairfield, N. J.
: Augustus M. Kelley, 1976), pp. 79-88.John Stuart Mill, Principles of Political Economy, Ashley ed.
(1909; reprint ed., Fairfield, N. J.: Augustus M.
Kelley, 1976), pp. 79-88.Marx, K, “Critique of the Hegelian Dialectic and Philosophy as a Whole,” Economic and Philosophic Manuscripts of 1844 (Moscow: Foreign Languages Publishing House, 1961Marx, K. (1967) Capital: a critique of political economy, 3 vols (1st edns: 1867, 1885, 1894), ed.
by F. Engels, New York: International Publishers.Marx, K. (1968) Theories of Surplus-Value, Part II, transl, and ed.
by S. W. Ryazanskaya, Moscow: Progress Publishers.Marx, K.
(1970) A Contribution to the Critique of Political Economy, transl, by S. W. Ryazanskaya and ed. by M.
Dobb, Moscow: Progress Publishers; 1st edn, 1859.Marx, K. The Holy Family, in Marx and Engels Collected Works, London, Lawrence and Wishart, vol. IV, 1975, p.
33.P. Sweezy, Modern Capitalism and Other Essays, New York, Monthly Review Press, 1972, p. 54.
Palgrave, R. H. I. (ed.
) (1894-9) Dictionary of Political Economy, 3 vols, London: Macmillan.Reisman, G. (1996). Capitalism: A Treatise on Economics.
Jameson Books, Ottawa, Illinois. Als available at: http://www.mises.org/story/1729Roncaglia, A.
(1985) Petty: the origins of political economy, New York: M. E. Sharpe; Italian edn, 1977.S.
Fischer, R. Dornbusch, and R. Schmalensee, Introduction to Microeconomics, New York, McGraw-Hill, 1988, p. 287.
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