PART ONE

CLASSICAL ECONOMICS

Introduction

It has become commonplace to describe the discipline of economics as beginning with an Adam, whose surname was Smith. While it is true that his great work - published in that revolutionary year, 1776 - launched the classical tradition in economic thought, a larger claim for his innovating role would not be justified.

Long before the eighteenth century, men had speculated about the nature of the economic process and recorded their judgements of its significance. Nevertheless, the questions raised by the classical approach - and the manner in which its practitioners handled them - were recognizably modern. In the main, pre-classical literature had been more disposed to judge economic performance than to analyse it. Medieval economic debates, for example, were largely preoccupied with such ethical questions as: what constitutes the just price? and is usury (i.e. lending at interest) morally defensible? Even after these considerations shaded towards the background, as they had by the seventeenth century, explicit economic analysis on a comprehensive scale was yet to flourish. Though a lively debate was carried on in tracts produced in England at this time, most of its participants took only a piecemeal view of the workings of the economic system and few of them made a conscious effort to detach their arguments from their interest in promoting the advantage of particular groups.

The classical perspective gave a fresh orientation to economic discussion. Yet in, at least one respect the classical outlook can be understood as an extension of inquiries initiated by its immediate forerunners. The mercantilist tradition in England and the Physiocratic School in France had, in quite different ways, directed attention to the importance of an economic 'surplus'. The classical economists sustained the exploration of this issue, but gave it another interpretation.

Mercantilist pamphleteers in the seventeenth and early eighteenth centuries, though they did not speak with one voice on many important subjects, were virtually unanimous on one point: the importance of a surplus of exports over imports (i.e. a favourable balance of trade). As a practical matter, the generation of a 'surplus' in this form was also favourable to the earnings of firms engaged in foreign trade, in whose fortunes a fair number of the pamphleteers had a personal stake. But the case for a 'surplus' through trade could be and was argued on grounds of national benefit. A favourable international balance was alleged to promise power, plenty, or both. The mechanism through which these happy results were to be achieved, however, was seldom explicitly articulated.

Circumstances of the times provided several plausible links between export surpluses and the national interest. In an age in which the circulating medium consisted almost exclusively of precious metals, countries (of which England was one) lacking sizeable and exploitable deposits of gold or silver were obliged to draw on foreign supplies. A favourable balance in the international accounts was thus a pre-condition for substantial enlargements of the money supply called for by a prospering and expanding economy. Similarly the accumulation of monetary reserves might promote the interests of the state in either or both of two ways. The sovereign's ability to command men and arms was thereby enhanced. In addition, the acquisition of gold and silver through foreign trade might deplete the reserves of other states, thus improving the relative - as well as the absolute - position of the surplus country. In an era of intense national rivalries few statesmen were indifferent to these considerations.

The pursuit of mercantilist objectives implied a considerable degree of state intervention in economic activity. In the interests of curtailing expenditures on imports most European states of that era encouraged steps toward national self-sufficiency, and on these grounds governments attempted to nurture and protect home enterprises. In England agriculture was sheltered from foreign competition through the sliding scale tariff provided by the Corn Laws (which in years of good harvests virtually excluded grain imports, though when home supplies were low and prices high, imported grain could then bear the cost of the lowered protective duties). Meanwhile, in the France of Colbert, manufacturing establishments were launched and subsidized by government. In addition governments sought to earn as well as to save foreign exchange by stimulating their export trades. This consideration appeared to recommend the award of monopolistic trading privileges to companies prepared to develop new markets - particularly, though not exclusively, in the trade beyond Europe. Moreover, it was held to be important to both the strategies of import restriction and export promotion to hold down costs of production - especially labour costs - at home.

The approach to economic policy adopted by French mercantilism provided the background for the intellectual protests of the Physiocratic School. In the history of economic ideas, however, writers of this persuasion are better remembered for the fundamentally different account they offered of an economy's crucial surplus. In this doctrine agriculture was the only genuinely productive sector of the economy, and the generator of a 'surplus' upon which all else depended. Agricultural production was alleged to be unique; a farmer could plant one seed and, in due course, reap twenty. A manufacturer, on the other hand, could register no similar multiplication in the physical product; he simply altered the shape of the material inputs on which he worked. The Physiocrats drove this point home by describing manufacturing as 'sterile' and reserving the term 'productive' for agriculturalists. One prominent Physiocrat - Dr François Quesnay, a physician in the court of Louis XV, whose duties included attendance on Mme de Pompadour - produced an ingenious diagram, labelled the 'Tableau Economique', to communicate this finding. His intention was to demonstrate how the fate of the economy was regulated by productivity in agriculture and how its surplus was diffused throughout the system in a network of transactions. With this scheme French economic policy could be attacked with the argument that it discriminated against 'productive' agriculture in favour of 'sterile' manufacturing enterprise. This assault on mercantilist policies anticipated Smith's criticism. But the 'Economistes' of the Physiocratic School were also pioneers in another respect: they demonstrated, with a degree of sophistication then unprecedented, how deductive reasoning could be employed to convey a picture of the functioning of an economic system.

The English classical school sustained interest in the origins and nature of an economic surplus and enlarged the assault on the restrictive policies of mercantilism. Like the Physiocrats (but unlike mercantilist writers) its members were to argue that the surplus arose not from trade but from production. Beyond this point the classicists and Physiocrats parted company. In the view of classical writers agriculture was no longer the only productive activity; manufacturing could also generate a surplus. The further probing into the character of the surplus and into the factors influencing its magnitude became, in fact, one of the central themes of classical analysis.

This line of argument was readily compatible with the requirements of emerging industrialism. The availability of a surplus from which capital could be accumulated was clearly a vital concern. No less important to the successful fostering of economic expansion was the efficient utilization of this potential. In the diagnosis provided by classical writers, the institutional arrangements of mercantilism were ill-suited to this assignment. As they saw matters, regulations and restrictions on the movement of men and goods were shackles to efficiency and to growth. They called for a world in which the energies of enterprising individuals would be liberated and in which market privileges accorded to those in official favour would be stripped away.

As has been true both before and since, the technique of inquiry in the classical era - no less than the choice of problems to be addressed - was influenced by the intellectual climate of the times. Most of the main contributors to the classical tradition - and all of its founding fathers - viewed the economic order as analogous to the physical universe depicted by Newtonian mechanics. Economic affairs were regarded as governed by laws which, though ascertainable by man, lay beyond his direct control. In their day-to-day business, men were still well advised to understand the properties of these laws in order to guide their actions intelligently. It was indeed an important objective of economic studies to propagate an understanding of the significance of these laws.

Such a view of the world was to have a formidable influence on the development of classical analysis and on the policy recommendations of its practitioners. Classical economists, like political theorists before them, were disposed to idealize the state of nature. Locke and Rousseau, each in quite different ways, had argued that the conditions of nature provided an appropriate standard against which to measure existing social institutions, and their doctrines could be used to support revolutionary causes. In the hands of classical economists the 'natural order' became a weapon with which to attack the state regulation and protection associated with the mercantilist era. The term 'mercantilism' was actually coined by the English classicists and Physiocrats who used it as a label of abuse. This polemical device has done less than ideal service to historical accuracy. Expressions like Smith's ‘the mercantile system' imputed more coherence to the thought of that era than it, in fact, possessed.

These ingredients of the classical mentality were forcefully brought to bear on one central question - the analysis of economic growth over extended time periods. Though the theoretical literature of classicism was to deal with a variety of issues, an overriding concern with the theme of economic growth took precedence in the moulding of its analytical categories.

This choice of focal point was clearly pertinent to the concerns of the time. By all the measurable indices, eighteenth-century Britain had enjoyed a considerable expansion in real output. At least in embryonic form, industrialism was well under way. The tempo of economic life was changing, and at a pace more rapid than most of the classical writers the perceived. But if economic expansion had already occurred, it was also clear that much remained to be done.