Eco 368

History of Economic Thought
LECTURE NOTES II
Classical Economics & Capitalism

  • Part II: Classical Economics & Capitalism

    Adam Smith and the Scottish Enlightenment

    Adam Smith was one of a number of well educated (often in the law) gentlemen associated with a movement refered to today as the "Scottish Enlightenment." Besides Adam Smith, probably the best known participant in this group was David Hume. These gentlemen were Lowland Scots based in Glasgow or Edinburgh and they worked and wrote against the backdrop of the spread of England's empire and the revolts against it. Even before the American revolution against English rule, the Highland Scots had revolted repeatedly in the 18th Century, pouring out of the glens, weilding their claymores against English muskets in lowland Scotland and even invading England itself. While the first English reaction was military (defeating the Jacobite rebellions and slaughtering clans people wherever they could find them) in the longer run they, with the backing of the intellectuals of the Scottish Enlightenment, carried out what we would call today a counterinsurgency program of enclosure, clearances and cultural decimation against the Highland clans --in short a program of cultural genocide designed to wipe out a people and integrate whatever individuals were left into English capitalism. (NB: see time-line of Scottish history and its links for more detail, especially on the highland clearances. Watch movies Braveheart and Rob Royfor Hollywood treatments of Highlanders and politics of the times. Read Sir Walter Scott's novel Rob Roy for a Scottish fictional account of a real Highland hero.)

    Smith on the Mercantilists

    This said, let us begin by examining Smith's relation to the mercantilists who preceeded him and whose ideas he sought to go beyond. For our purposes the first chapter[pdf file] of the fourth book of his Inquiry into the Nature and Causes of the Wealth of Nations provides a tidy summary of Smith's views of their focus on money as the key form of wealth and of the need for an "overplus" of exports in order to expand its supply.

    First, Smith argues that in their better moments even the mercantilists knew that the real wealth of a country was its "land, houses and consumable goods" rather than money. Second, he argues that the primary benefit from trade is the expansion of the market for domestic produce that makes it possible to sell any local surpluses and encourages the further development of industry. He chides the Spanish and Portuguese for destroying the Mexican and Peruvian empires and thus limiting possible trade. He also attacks the monopolization of European empirial trade, such as the granting of a monopoly to Mun's East Indies Company, as another stifling of trade and hence of the colonizing country's own wealth. He points with approval to the freer trade with the North American colonies. (As for the indigenous population of North America, Smith dismisses them as "mere savages" and therefore of no use to trade or Empire.) Smith's portrayal of mercantile writing as the sophistry of merchants out for their own gain is biting.

    Smith on the need to impose work

    But while Smith may have mocked the self-interested discourses of the mercantilists on trade, his own views on the need to impose work on those who might otherwise be idle were very much in harmony with those of his predecessors. In chapter three [pdf file] of the second book of the Wealth of Nations he wrote of the great social advantages of employing money as "capital," i.e., as the means of putting people to work, as opposed to its use as mere income or revenue, i.e., for personal enjoyment. His words are aimed principally at the way money spent by the rich on consumption is diverted away from putting people to work and supporting them in idleness, but his distaste for idleness itself is quite clear. "Our ancestors," he wrote, "were idle for want of a sufficient encouragement to industry. It is better, says the proverb, to play for nothing , than to work for nothing." Like Mun before him he pointed to Holland as a fundamental point of reference. "In mercantile and manufacturing towns, where the inferior ranks of people are chiefly maintained by the employment of capital, they are in general industrious, sober, and thriving; as in many English, and in most Dutch towns."

    In his distaste for "idleness" and enthousiasm for "industriousness" Smith was typical of the pro-business writers of his age (and of most who came after him as well) who laid out one justification after another for turning most of humankind into "workers." Leaving aside the well known protestant theologians (like Calvin) and sticking to writers familiar to the history of economic, thought it is easy to see the continuity between John Locke's preoccupation to replace any child's tendency toward idleness with the habits of hard work [pdf file] and Smith's critique of various workers' "slothful habits." Indeed the language is much the same. Compare the foregoing considerations of Locke on the dangers of a child's "sauntering" with Smith's condemnation of the "sauntering" of country workmen in the opening chapter [pdf file] of the Wealth of Nations:

    Compare these two "work ethic" condemnations with two other contrary recommendations as to the joys of sauntering and idleness. The first is from David Thoreau's essay on the virtues of walking, the second from Bertrand Russell's essay In Praise of Idleness."

    Where Smith differed from the mercantilists was his emphasis on manufacturing as the real terrain of putting people to work as opposed to trade which was a secondary means to an end. Obviously a great many men were put to work on the ships of foreign trade --and those men and their struggles (jumping ship, turning pirate, etc) were key to the broader resistance against capitalist work-- but numerically they constituted a small part of the "working" class. Viewed within the context of a growing international division of labor (e.g., slaves in America producing cotton to be worked up in factories in England) those seamen (who loaded, carried and delivered that cotton across the Atlantic) were in a sense as "internal" to the emerging "global factory" as an assembly line that brings parts to workers within a plant, but this was an insight that was more consistent with Smith's emphasis than one he was able to articulate.

    Adam Smith is, however, justly famous for spelling out, more clearly than any before him, how the new and increasingly important source of wealth in emerging capitalist society was precisely the work being organized by industrial capitalists, work increasingly being incarcerated in factories. It was for that reason that Smith began the Wealth of Nations with an analysis of the division of labor in a factory and its impact on production and the productivity of labor. This was a whole domain which had, for the most part, remained beyond the kin and analysis of the mercantilists.(And one which would eventually, it should be noted, disappear from the concerns of economists in the 20th Century and be relegated to the attentions of industrial engineers, sociologists and psychologists.)

    Smith on the Physiocrats

    Before turning to Smith's fundamental emphasis on work as the basis of modern society, let us first briefly note his views on that other school of economic thought that was highly critical of the mercantilists: the physiocrats. As we have seen, the physiocrats shifted their focus from trade to the productiveness of land and agriculture. Now during a stay in Paris, Smith had met and discussed with François Quesnay and had the greatest respect for the man and his ideas. Although he spends considerably less time in the Wealth of Nations discussing their views than he does the mercantilists it is entirely because mercantile thought was much more influential and, in Smith's view, much more mistaken than that of the physiocrats. Indeed, where he accuses the mercantilists of sophistry and self-serving argument, in the ninth [pdf file] and last chapter of Book Four of the Wealth of Nations, he repeatedly honors the physiocrats for the sophistication and general thrust of their views.

    Two of those thrusts are of fundamental importance for him. First, he is clearly fascinated and influenced by Quesnay's Tableau Économique and its attempt to grasp the total expanded reproduction of society. While he criticizes Quesnay and his followers for thinking that only the labor expended in agriculture is productive and argues at length as to the productive character of labor in industry, the general view expressed in the Tableau as to how labor produces and reproduces society as a whole seems to have been taken over by Smith and provided something of a totalizing framework for his own work. He has no Tableau Économique of his own but it provides him with a point of departure to elaborate a vision and an analysis of a self-reproducting society. It is, I think, for this reason that he writes: "This system, however, with all its imperfections, is, perhaps, the nearest approximation to the truth that has yet been published upon the subject of political economy [...]"

    Second, beyond the fundamental role of labor (rather than land) in producing wealth, Smith embraces the Physiocrats call for "free and unfettered trade," at home and abroad, as the key to the expansion of industry. Indeed, free trade means free markets and the automatic ajustments of free markets become for Smith the means to not only reproduce society but to do so in a way that maximizes social welfare. This general vision of automatically self-regulating free markets amounts to a generalization of Cantillon and Hume's understanding of the self-regulating dynamics of the species-flow mechanism and becomes the substance of Smith's famous "invisible hand."

    [NB:Following Smith one of most widely quoted spokespersons for free trade was the French economist Frédéric Bastiat (1801-1850). Although he was no great theorist, Bastiat had an acid wit and attacked protectionist trade policies even more bitingly than Smith. His Petition is without doubt the best known of his satirical attacks on protection --through which he promoted free trade.]

    Smith on Value

    The title of the first book of the Wealth of Nations begins: "Of the Causes of Improvement in the Productive Powers of Labour." The immediate subject of the opening chapter is the "causes" (i.e., the division of labor) but the phemonemon about whose improvement he is concerned is, first and foremost, "labour." In other words, Smith begins by focusing on work, human work, human work as imposed and organized by capitalists. These capitalists are not "putting their money to work" but are rather using their money to put other people to work. It is in his central preoccupation with "labour" or "work under capitalism" that Smith distinguishes himself and ultimately the whole "School of Classical Economics" from the mercantile preoccupation with money and trade and the physiocratic preoccupation with land. It is in the broadest of senses that Smith has a "labor theory of value."

    There were "labor theories" of value before Smith, and after him, but those before were more philosophical expressions of the increasing centrality of work as capitalism arose, i.e., John Locke's meditations on the fundamental role of labor in the establishment of "property," [pdf file] and those after were aimed either at the moral approbation of the working class or at a basic critique of capitalism for the way its imposition of work cripples and limits humanity. Smith, on the other hand, drew upon Locke to focus the world's attention on the basic change in social life being organized by the rising capitalist class: humanity henceforth would not work to live, but live to work.

    In the Wealth of Nations Smith brings his readers to his labor theory of value through a discussion of money and variations in both the value of money (being traditionally metal) and in the values of other commodities measured in money. These endless variations lead him to seek something more constant lurking behind or within such money valuation. What he holds up as the not-so-hidden secret of real value (remember he takes the basic idea over from Locke and others before him) is labor.

    On the one hand, Smith makes his view of the centrality of labor clear in the very first sentence of the Wealth of Nations: "The annual labour of every nation," he begins, "is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes [. . .]." But he begins his more detailed discussion of "value" at the end of Chapter Four on "The Origin and Use of Money" in Book I. "The word value," he observes, "has two different meanings, and sometimes expresses the utility of some particular object,and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' What is of primary interest, of course, is "value in exchange," and he devotes the next chapter (5) to elucidating the "real measure of exchange value."

    The "real measure of the exchange value of all commodities," he explains, "is labor."

    He goes on to discuss how the difficulty of measuring relative quantities of labor leads to "value" being estimated first by other commodities (in barter) and then by money (in a more fully developed exchange system). But money prices, he insists, are but the imperfect surface reflection of the labor that actually produced the commodities in question.

    Well, if "Labour alone, therefore, [. . .] is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared," then it consitutes, in Smith's terms, "their real price" and money is only their "nominal price."

    In the following chapter (6), Smith juxtaposes a precapitalist situation in which all individuals work for themselves and naturally enjoy the full "property"(Locke) and use of the fruits of their labor, with the situation that obtains in capitalism in which the capitalist appropriates some part of the value produced by those his money has set to work as profit. [NB: this portrayal of "primitive" society as one of atomistically separate individuals who "work for themselves" alone, is an ideological construction. In reality all societies have involved interconnected individuals who work together.] Smith also points out how those who own land are able to "reap where they have not sown" appropriating part of the fruits of labor as rent.

    Smith on Capitalists

    But whereas Smith clearly has neither empathy nor patience with landlords and their "unreasonable demand" for rent, he is quite understanding towards capitalists, arguing that naturally they would not advance their "stock" (by which he means both investment capital and what it buys as tools, raw materials and labor) unless they can make a profit from it. Please note: while there is an articulation of the "desires" and "behavior" of businessmen and landlords, there is no real theory to explain what portion of the fruits of labor they will be able to appropriate.

    The fact that Smith saw landlords as parasitic, and capitalists as justified in their demands for profit, however, in no way blinded him to the coniving, self-serving behavior of the latter. There are any number of passages in the Wealth of Nations where Smith speaks disparagingly of capitalists and the frequent antagonism between their interests and those of society as a whole. At the very end of Book I, for instance, he issues a warning that sounds a lot like his critique of mercantilist self interest:

    So much for such familiar business aphorisms as: "What's good for General Motors is good for the country." (Or perhaps at this point in history "What's good for the oil companies is good for the country.")

    Despite his clear belief that capitalism is characterized by a general accumulation of wealth via investment and market dynamics, Smith was also not blind to the class structure of capitalist society and or to the antagonisms of that class structure.

    In his chapter on the wages of labor, Smith is quite frank about how capitalists combine to form a class for the exploitation of workers and how the state (law) is used to prevent workers from combining in turn to defend themselves:

    In part 2 of chapter one of Book V, Smith explains how only the ability of capitalists to call on the police power of the state for their own protection preserves the property and power of capital in the face of the poverty and hostility it generates.

    Moreover, Smith well knew that "the inferior rank of people's" resentful attitude toward the work they were forced to do was, at least in part due to its stultifying character. In a discussion of education, in the first chapter of Book 5, he juxtaposes the horrifying effects of the specialization associated with the developed capitalist division of labor with the healthier consequences of earlier societies that could generate warriors as well as workers. It seems highly likely that the "warriors" Smith had most in mind were the Highlanders who had invaded his part of Scotland again and again in the 18th Century finding little effective resistance. Certainly, such thoughts had been expressed by Smiths close friend David Hume after the 1745 Jacobite uprising and occupation of Edinburgh:

    At any rate, Smith's description of how specialization and overwork can cripple workers would find its echos in generations of anti-capitalist agitators --although they would often find that resistance to such tendencies would render workers far more capable of though and action than Smith perceives.

    Recognizing these effects, Smith calls upon the government to make at least modest efforts to avoid such ignorance by providing the rudiments of education to working class children before they enter the factory. Such education, he argues, would render the workers less succeptible to "delusions of enthousiasms" and "less apt to be misled into any wanton or unnecessary opposition to the measures of government." [NB: He offers no alternative to the crippling capitalist organization of work, only a measure that might get workers to accept it more readily.]

    But while Smith could see a usefulness in the state trying to educate workers not to rebel, he generally thought that rebellions were doomed to failure anyway, especially efforts to raise their wages. Not only were the combination acts arrayed against them but so was the labor market.

    Any increase in wages, he felt, would lead workers to marry more often and to support their children better such that the supply of labor would rise and push their wages back down. In his chapter on "the wages of labor" he wrote that "the liberal reward of labor [. . .] is the cause of increasing population" and that "excessive multiplication" would soon lower wages back to subsistance. These were ideas that would be taken over and elaborated by the Rev. Thomas Malthus in his famous Essay on the Principle of Population(see below) --a book that would become a weapon in the hands of "the masters" against any attempt to improve the condition of the poor, whether through higher wages or welfare.

    With Adam Smith, therefore, we find ourselves led from the mercantilist preoccupation with money and trade, through the physiocratic perception of the real relationships of which money is only the expression, to the rough and tumble of class struggle.

    Smith on Money

    But along the way, as we have seen, Smith never loses sight of either money or trade and of their key roles in facilitating the operations of capitalism. Indeed, when in chapter two of Book II of the Wealth of Nations he takes up the analysis of money he points directly to those roles. In the process he echos John Law's earlier emphases first, on the way paper and credit money were rapidly replacing the circulation of gold and silver (and in the process reducing the costs of circulation) and second, how despite that replacement the quantity of such money in circulation was still determined by the endogenous requirements of trade.

    Here Smith embraced the "real bills doctrine" arguing that any excess of money in circulation would soon be withdrawn. If the excess were in gold and silver, they would be withdrawn from circulation and sent abroad so as not to profitably employed. If the excess were in paper money, it too would be withdrawn, but because local paper money is not acceptable abroad it would first be converted into gold and silver in order to be sent abroad. In this way Smith argued not only that "the whole paper money of every kind which can easily circulate in any country never can exceed the value of gold and silver, of which it supplies the place [. . .]" but also that the value of money in circulation can never exceed that required by the circulation of existing trade.

    Godwin against Work

    Before moving on to the next of the great classical economists, it should be noted that while Smith may have accepted the inevitability of most people being subjected to low wages and too much work, many others did not. The working class, as he clearly saw, objected most vehemently but their objections were echoed and articulated by a few intellectuals as well. Among them was one particularly well known writer, William Godwin (1756-1836). Godwin was a major figure in critical social circles of the early 19th Century. He was married to Mary Wollestonecraft, one of the more outspoken advocates for the rights of women, and their daughter, Mary who married the poet Shelley became famous for her novel Frankenstein. Godwin's social writings were widely read and he became known as an influential critic of capitalism.

    Among Godwin's most analytical and serious works was An Inquiry Concerning Political Justice published in 1793. In that work, he attacked the capitalist subordination of most people's lives to work, arguing that if society were better organized people could live better, healthier, richer lives with far less work.

    In chapter two [pdf file] of Book 8 of An Inquiry Godwin argues:

    Such a reduction,he argues, is quite possible, only the current institutions of capitalism stand in the way. After laying out the many ways in which the current labor of society is excessive, Godwin in chapter 6 [pdf file]of this same Book asserts:

    Rev. Thomas Malthus

    The Reverend Thomas Robert Malthus (1766-1834) was the son of upper middle class English clergyman and was the first academic economist, teaching at East India College set up by the East Indies Company to train its bureaucrats. Without doubt Malthus is best known for his Essay on the Principle of Population in which he argues against any attempt to improve the lot of the poor (whether waged or unwaged) by raising their income and against any ideas (such as Godwin's --see above) that any very substantial reduction in work time was achievable. We will examine his arguments on these two points in turn.

    Now Malthus couched the arguments of his Essay in very general terms that asserted the propensity of human beings to procreate as much as their income made possible and that this propensity was only curbed by limits on available income. Moreover, he argued, in a now famous mathematical manner, that human ability to raise food supplies will check the growth of population quite brutally by famine unless war or epidemic act first. Malthus writes in the opening chapter of his Essay:

    The consequences of this argument were two fold: first, and most general, was the putting into the hands of "the masters" an intellectual weapon that could be weilded against any efforts to raise wages or working class income of any form; second, and more particular, was Malthus' use of his reasoning to attack the British Poor Laws as doing more harm than good. Indeed, so popular have Malthus' arguments been down through the years that a careful reading will reveal how little recent arguments against welfare at the end of the 20th Century have changed from those put forward 200 years ago.

    Malthus against the Poor Laws

    On the one hand, Malthus argues that feeding the unwaged poor will just lead them to marry more, breed faster, work less and be a burden on society. On the other hand, he formulates this argument in a way that the heaviest part of that burden is carried by the waged poor, the rest of the working class. In chapter five of the Essay he writes:

    In short, he argues that helping some of the poor is worse than a waste of time; it will make the working class as a whole worse off. Compare this with recent arguments against welfare that pit taxpaying workers against those on welfare. (Or for that matter, those paying social security taxes against those who receive social security payments.)

    Malthus' argument as to why food production could not be increased enough to keep up with population growth, which David Ricardo and others would take over, was based on his perception of declining marginal returns as cultivation was pushed from more fertile lands onto less fertile ones in countries like England. What this argument neglected, with Malthus and later with Ricardo, was the enormous increases in agricultural productivity that was possible on existing land, increases that would make it possible to feed a much larger population than they thought possible, and feed it better. ("Better" leaves aside here the issue of the quality of mass produced food commercialized by corporate agribusiness.)

    Malthus against Godwin and the reduction of work

    Anyone who takes the trouble to read the whole of Malthus's Essay will discover that much of the book is directed quite explicitly against the critics of capitalism, especially William Godwin. The general thrust of Malthus' argument is a rejection of Godwin's emphasis on the institutions of capitalism and an appeal to "natural law."

    [NB:the critique of the insitutions of capitalism will be a recurring theme among its critics from anti-capitalists like Karl Marx to reformers like the institutionalists (see below).]

    Beginning in chapter ten Malthus lays into Godwin's appeals for a more equal and just society wielding his theory of population to argue the impossible survival of any such schemes.

    Malthus explicitly attacks Godwin's proposition that it would be possible to dramatically reduce the amount of work each person needs to do and free up vast amounts of time for more interesting human endeavors. The way he uses his theory of population against Godwin is this: first, he admits the imaginability of Godwin's idea of equality as well as some other features of Godwin's imagination such as benevolence and free love. He then argues that under such circumstances population would explode:

    Given the impossibility of increasing food production as rapidly as population, Malthus argues such circumstances would produce growing scarcity, the rebirth of selfishness, competition, capitalism and the death of Godwin's Utopia.

    Please note: Malthus' rejection of Godwin's argument and his belief in the inevitability of capitalism hinges entirely on his assumption (one that pervades all his arguments) that there is a "natural law" that people will breed like rabbits as their income and well-being rises. This is, of course, a complete fallacy as history (the well-known "demographic transition" of the fall of birth rates with rising income) and the choice of women to bear fewer children as their rights have widened have demonstrated. Never the less, Malthus could comfortably conclude his polemic in chapter fifteen with the following admonition:

    Malthus on "glut" or "crisis"

    However much of an apologist Malthus was vis a vis the capitalist organization of society, he was nevertheless not blind to the uneven pattern of its development and was one of the first to argue that it faced a recurrent problem of glutted markets and the crises that such gluts produced, e.g., unemployment, financial collapse, etc. To the other classical economists of this time, such an arguement was heretical.

    As we have seen with Adam Smith, the classical vision was one in which markets and their price mechanisms worked to bring about a smooth allocation of resources and commodities throughout society. There might be momentary disruptions here or there in a particular trade, i.e., textile manufacturers may overestimate the demand for their wares and "glut" the market temporarily, but in such a situation it was believed the increase in supply relative to demand would bring down prices and soon bring supply back into alignment with demand. Or, a period of rapid accumulation might bring about a rise in wages above the normal, but as both Smith and Malthus himself argued, such a rise would soon bring forth an increase in labor supply that would push wages back down.

    One of the clearest expositions of this classical vision that markets in general preclude the possibility of generalized crisis, was made by Jean-Baptiste Say (1767-1832) a French economist and admirer of Adam Smith. Say repeatedly made arguments such as the following in Book I, chapter XV of his 1803 Traite d'economie politique:

    Such statements popularized the market vision and led to frequent reference to "Say's Law," i.e., "supply creates its own demand" as a truism about the behavior of the market economy in general --if not in particular. Malthus, on the other hand, looked around at the reality of the capitalism of his time and saw emerging what later economists would come to call "business cycles," or, among the less sanguine, "crises." Such cycles or crises, he saw were not limited to particular markets as Smith or Say believed but all too regularly became quite general and inflicted considerable hardships on all variety of workers, merchants, bankers etc. Like it or not, he argued, one must recognize the recurrent existence of what he called "a general glut" and defined as follows:

    Malthus' position on "gluts" brought him into public debate with his friend and fellow classical economist David Ricardo. As we will see this was not the only issue over which he and Ricardo would publically disagree.

    David Ricardo

    Whereas Thomas Malthus taught at a school founded by the biggest corporation of its day, David Ricardo (1772-1823) was both the son of a businessman and a businessman himself who made a fortune playing the stockmarket. Among those few economists who concern themselves with the history of economic thought Ricardo is generally considered the second most important "classical" after Adam Smith. His reputation stems partly from the quality of his arguments about various issues, but primarily from the way he reasoned in terms of abstract economic models. Unlike the works of Smith, and even Malthus, Ricardo's writings are relatively terse expositions without any great wealth of historical detail or digressions into secondary subjects. Where Smith's Wealth of Nations sweeps back and forth across human history, Ricardo's On the Principles of Political Economy and Taxation is much more narrowly focused and argued. Given the predeliction of contemporary economists for mathematical models, it is easy to see the source of this estime in which he is often held

    Beyond questions of methodology, however, what is most striking about Ricardo's work is its shift in emphasis from Smith's focus on the production of wealth via investment and accumulation to a new focus on the distribution of what is produced. Ricardo spells this out immediately in the preface to his Principles:

    In other words, Ricardo's major preoccupation is to determine the relative evolution of rent, profit and wages through time. Smith had already asserted, as we have seen, that wages tend to fluctuate around a subsistence level and that profits tend to decline and growth slow as an economy matures, but he provided no satisfactory theory as to these trends. Malthus, on the other hand, in his considerations on the limits to the ability of agricultural production to keep up with population growth, did provide, and Ricardo accepted, a theory of the evolution of rent: namely that as cultivation expands from more fertile to less fertile lands the differential between rates of return on cultivation would grow, and with them so too would rent.

    In chapter two of the Principles Ricardo spells this out in his own words:

    Similarly, Ricardo argues, if more capital and labor is applied to existing land, albeit with diminishing returns, there too will rent be generated:

    Because the accumulation of capital and population over time induces a repeated spread of cultivation from better lands to poorer lands, or the expenditure of increasing amounts of investment on limited quantities of land, the inevitable consequence will be diminishing returns and a repeated rise in rent, and thus in the share of national output going to the landlord class.

    But Ricardo agrees with Malthus that wages are more or less fixed at subsistance (or rising slowly over time as the requirements for the reproduction of the working class increases) by the dynamics of population growth. In other words if money wages rise above the "natural price" of labor (i.e., subsistance) then workers will be better off, their numbers will increase and wages will fall. Similarly, if wages fall below the natural price, their numbers will be reduced and wages will rise. Here is Ricardo on the subject (from the second chapter of his Principles):

    [NB: Ricardo, therefore, joins Malthus in his attack on the British Poor Laws and calls for their complete abolition and an unconstrained market for labor.]

    Therefore if rent rises while wages remain steady, profits will be squeezed between rising rents and steady (or rising) wages and will fall. Because profits are the means of investment, such a tendency for the rate of profit to decline would eventually mean a decline in growth toward stagnation.

    As Ricardo concludes in his chapter six on profits:

    Ricardo's theories of wages, profits and rent, therefore, add up to a vision of the capitalist future even gloomier than that of Malthus. Not only will the poor never get rich but neither will the capitalists. Only the landlords will benefit and the growth of those benefits will themselves eventually come to an end as falling profits lead to declining investment and stagnation.

    The question of "glut" or "crisis"

    Ricardo fully embraced Say's Law and used it to argue against the idea that a crisis could be created in accumulation through what, since Keynes, is called "inadequate aggregate demand," i.e., a total demand for all good inadequate to absorb those supplied to the market. He could not fail to recognize the possibility that some markets might be glutted --this was, after all, a recurrent problem in his time-- but refused to admit that such a problem could become general.

    In chapter 21 on the "Effects of Accumulation on Profits and Interest" of his Principles he wrote directly to this issue:

    This rejection of the possibility of a general glut was rejected in turn by Malthus with arguments that made him, in retrospect, one of the originators of a line of theoretical argument concerning the importance to accumulation of the adequacy of aggregate demand that would run from his time through critics of capitalism such as Marx and John Hobson to one of its most famous saviors, John Maynard Keynes.

    Malthus states his rejection baldly in Section III of Chapter I of Book II of his Principles of Political Economy:

    In that section he takes up the question of whether there are any limits to the ability of increased savings and investment (accumulation) to increase growth. His answer is that there are definite limits and those limits are produced if increases in savings come at the expense of reductions in demand.

    Ricardo, he points out, admitted in his Principles that if wages rose, undermining profits, and capitalists sought to compensate by substantially reducing their consumption in order to have more surplus to invest, their reduction in consumption demand coupled with the subsequent accumulation and increase in supply could have the effect of creating a "general glut." Ricardo claimed, however, that "This admission does not impugn the general principle." [that no general gluts are possible] Malthus, on the contrary, says that because "a country is always liable to an increase in the quantity of the funds for the maintenance of labour faster than the increase of population" Ricardo's special case is not so special and may occur recurrently.

    To this Malthus adds another argument: suppose a rise in productivity and a cheapening of commodities leads not to greater demand for more goods but rather to a demand for more leisure ("indolence"). Such a preference for leisure (and we know he thinks workers detest work, and for good reason) would, he says, mean that supply would outstrip demand and a "general glut" would ensue.

    Finally, Malthus argues, that it is false to assert, as Ricardo does, that the expenditure of the savings intended for accumulation will constitute a demand for the increased output that results from investment. Using farmers and manufacturers, he says, their increased savings would reduce each's demand for the others products and a general glut could result. In this argument Malthus, of course, fails to distinguish between "producer goods" and "consumer goods" and thus fails to adequately assess the demand for the former --a common fallacy in the history of such "underconsumption" theories of crisis.

    The Debate over the Corn Laws

    Another area of contention between Malthus and Ricardo, and one which greatly preoccupied many in society, was the issue of whether or not the "corn laws" --by which was mean laws limiting the importation of wheat-- should be reduced or eliminated. The contemporary relevance of such a debate should be clear enough given the intensity of current conflicts over the World Trade Organization and its efforts to reduce barriers to trade.

    The corn laws had been introduced in 1815 in the wake of the Napoleonic Wars by parliamentary friends of the landlord class in order to keep up the high prices of grain that had prevailed during the wars when much trade had been reduced by the conflict. The high resulting continuation of high prices hurt both workers who had to pay for bread, and manufacturers who had to pay wages sufficient to buy the bread and whose ability to export was limited by other countries inability to sell wheat to England.

    After the passage of the Reform Act of 1832 gave the vote to middle class capitalists and merchants and forced parliament to pay attention to them, they began to organize to get the Corn Laws repealed. An anti-corn law organization was created in 1836 which became the Anti-Corn Law League in 1839. The campaign continued until 1846 when, in the wake of the onset of the Great Irish Famine, the Peel government repealed the Laws. The Irish famine was, as is so often the case, not a case of a lack of food but rather of the inability of Irish workers to pay for it. That inability had two sources: first, the immediate source of poverty was the failure of the main Irish cash crop, potatos, due to blight, the second, historical, was English Imperialism that had conquered Ireland, stolen most of the land and pushed most of its people onto only a tiny amount of land and made them dependent on such a cash crop. Please note that the "Victoria Web" page linked above ignores the historical dimension of the famine and only dwells on the way the English at first ignored, then provided inadequate relief and finally sent in the army to control their colony. The result of these English Imperial policies was murder on a massive scale: the Irish population dropped from 8.2 to 6.5 million in a decade. At any rate, as the page does point out, the repeal of the Corn Laws did nothing to help the Irish in the midst of this horror because even when the price of food dropped they still couldn't afford to buy it.8.2 6.5

    It was in the midst of the agitation against the Corn Laws that Malthus and Ricardo debated. They both entered the fray early on, Malthus with one essay The Corn Laws in 1814 and another Grounds of an Opinion on the Policy of restricting the Importation of Foreign Corn in 1815 and Ricardo with a response the same year: An Essay on the Influence of a Low Price of Corn on the Profits of Stock .

    Whereas Malthus' first essay in 1814 was an attempt to present and evaluate both pro and con arguments, his second was explicitly in support of the Corn Laws. Despite all the usual advantages to free trade which he recognized, including the way in which increased imports of wheat would bring down the price of that grain and the bread made from it, Malthus argued that special circumstances made the case for high tariffs. The special circumstances he cited were the risks that other countries, especiall France with its vast grain production, would impose export constraints that might cut off English access to their grain. In other words, he argued, the English might suffer the consequences of embracing free trade when other countries did not. In making his case, he pointed to earlier cutoffs in English access to grain imports, e.g., during the Napoleonic wars, and to the consequences of sudden and dramatic increases and decreases in grain prices and grain availability.

    In Ricardo's response to Malthus, he begins with a general discussion of rent --agreeing in general with Malthus' own position on this subject-- and proceeds to argue that high food prices and the high rents they deliver to the landlords while beneficial to the latter harm everyone else: "It follows then, that the interest of the landlord is always opposed to the interest of every other class in the community. His situation is never so prosperous, as when food is scarce and dear: whereas, all other persons are greatly benefited by procuring food cheap."

    Ricardo's primary concern with the high prices of food that were supported first by the absense of importable grain during the war years and then by the Corn Laws is with their negative effects on the profits of capital: "It may be most satisfactorily proved, that in every society advancing in wealth and population, independently of the effect produced by liberal or scanty wages, general profits must fall, unless there be improvements in agriculture, or corn can be imported at a cheaper price." Therefore, all other things held constant, cheap grain through free importation is preferable because it will hold down wages and raise profits.

    But Malthus argued that not all other things were constant but that, on the contrary, there was the danger of a shut off of access to foreign grain and therefore the danger of dramatic negative shocks to the English economy. To this Ricardo responded first, that once large scale exports of grain to England became normal and expected no country could shut off such exports without disasterous consequences to their own agriculture and danger of popular revolt (he cited the results of Bonaparte's cutting off of Russian grain exports as an example), second, England could, as in the past, obtain grain from other countries (as the US discovered when it blockaded sales of grain to Afghanistan during the period of Soviet influence there) especially once the free opening of British markets led producers in other countries to expand production expressly for the purposes of exporting to England, and third, that any decline in English agricultural production due to cheap grain could be softened by an gradual freeing of trade and at any rate capital withdrawn from agriculture would be invested in manufacturing to good effect and any decline in land lord consumption due to the fall in rents would be compensated for by a rise in the expenditure of profits and wages.

    As indicated above, despite Ricardo and the other anti-Corn Law advocates generally winning the intellectual debates, the power of the landlords was such as to keep the Corn Laws in place for another thirty years