Studies in economic analysis and policy in retrospect : from classical to modern period

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_STUDIES IN ECONOMIC POLICY

IN

ANALYSIS

AND

RETROSPECT

(From Classical To Modern Period)

K.N. PRASAD M.A. (Pat), Ph.D. (Cantab) University Professor & Head ofthe Department of Economics, Patna University, Patna-800005

STERLING New

PUBLISHERS

Delhi-110016

Bangalore-560009

PRIVATE

LTD

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STERLING PUBLISHERS PRIVATE LIMITED L-10, Green Park Extension, New Delhi-110016 695, Model Town, Jalandhar-144003 Sth Main Road, Gandhi Nagar, Bangalore-560009

Studies in Economic Analysis and Policy in Retrospect © 1984, K.N. Prasad

Printed in India

Published by S.K. Ghai, Managing Director, Sterling Publishers Pvt. Ltd., L-10, Green Park Extension, New Delhi-110016 and printed by Mahajan Enterprises, 18-A, Vir Nagar, West Sagarpur, New Delhi-110046 at Rashtra Vani Printers, Mayapuri, New Delhi.

Contents A Reader’s Guide Foreword

vi-—-Vii viii— xvi

Classical Approach to the Nature Science: An Appraisal Natural Sciences Versus Social view of the Controversy

of

Economic 1—15

Sciences:

An

Over-

16—31

The Practitioner Economist: Some Reflections on the Role of the Economist as an Adviser

32—46

Economic Science As It Is:

47—59

A Synoptic View

Of Poverty in English Classical Political Economy

60—91

Classical Factor Classification (in retrospect)

92—112

Production Functions in Economic Analysis 113--136 aoe ie Value Approach in the Classical Theory of Distribution: A Stock-taking 137—151

so i0. 11.

12; 13.

© 14.

Theory of Rent as an Extension of Theory of Value: A Study in Historical Perspective

152—176

Some Aspects of the Modern Assessment

177—193

Demand ard Supply Theory of Wages

Theory of Rent:

Approach

in the

An

Classical 194—209

Value Approach in the Modern A Post-Mortem & A Critique

Theory

of Wages: 210—228

Evolution of the Classical Theories of Interest and Profits (with reference to the applications of the value approach) 229—252 Rehabilitation Recapitulation

Index:

of

the

Classical

Theory:

A 253—270

271—289

A Reader’s Guide [Figures indicate the pages to which the reader should turn for the discussion of the topic he is interested in. For further guidance he should consult the Subject Index).

I. Analysis/theory

48—Models

Vs.

Theories

56—Economic

science 26—Economics as a scicnce 32, 47—Positive Vs. Normative Economics 49—Recent trends in economics 35, 54—Prediction/ Prognostication in economics 56—Natural/physical sciences Vs. Social sciences 17—Similarities and dissimilarities between natural and social sciences in respect of methods of explanation, etc., 18, 47, 50—Limitations of economic science 21—Role of economic

theory in the making of economic policy 38, 54—Quantification in economics/role of econometrics 39, 42—Nature and significance of economic advice 37, 43— Welfare economics 41, 52. II. Political economy: During the mercantilist period 1— During the physiocratic period 1—During the classical period 2, 85—Analysis in classical economics 6—Methodology of classical economics 3—Nature of economic laws in classical economics 2— Theory of economic policy in classical economics 4—Discussion of poverty

in classical

classical political

economics:

economy

Causes and cures 60—Criticisms of

12, 87—Contributions

of Smith,

Say,

Malthus, Ricardo, James Mill, Senior, Mill, Cairnes, etc., 7, 61.

II.

Production

137—Factors

of production

Controversy over the number of factors 92, 109,

92, 97,

102—

111—Criticisms

of

factor classification 105, 110, 111—Land 97—Labour 99, 109, 110, 219—Capital 100, 109, 110 197, 230, 231, 253—Enterprise 103— Accumulation 253—Capital theory controversy 254, 237— Malthusian theory of population 201—Iso-quants 119—Elasticity of substitution 116—Production function 113, 116—Linear Homogeneous

Production

Function

127—Cobb-Douglas

129—Factor allociation by a firm 121—Limits

Production

Function

of production

by a

firm 124—Inputs Chs 7 & 14. IV. Classification of factors of production: Classical 92, 107—Neo-classical/Marshallian 106—Separation of value and exchange from production in classical economics 137—Class concept

A Reader’s Guide

vil

of preduction in classical

economics

Say, Malthus, Ricardo, Senior

function: Classical L15.

Mill,

92—Contributions Cairnes,

1. 4—Marginal/Neo-classical

etc.,

115,

of Smith,

94—Production

4:31—Modern

V. Law of demand and supply 139—Classical classification of goods—Consumption 246, 253—Demand 244, 145—Elasticities of demand and Supply 154, 171—Classical theory of value 139— Contributions of Smith,-Say, Malthus, Ricardo, Senior, Mill, Cairnes, etc., 139—Classical distinction between market and natural values 143. Vi. Distribution 138—Distribution and production function 134—Class concept of distribution in classical economics 92, 97, 102— Absence/Presence of value/pricing approach to distribution in classical economics 138, 146, 266—Distributive shares in classical economics 93, 97, 102—Interrelations of production and distribution in classical economics 253—Contributions of Smith, Say, Malthus, Ricardo, Senior, Mill, Cairnes, etc., 94—Thecries of distribution: Classical 140 —Marginalist 266—Criticisms of the marginalist theory 256—Neo-Keynsian theory 257, 267—Neo-neo-classical theory 257— Euler’s Theorem 128-9, 133, 230, 235. VII. Rent 93, 97, 102, 152, 177—Rent theories: Pre-classical 153—Classical 15$—Criticism of the classical theory 164, 174— Marginalist 164, 182—Marshallian 167, 183—Neo-marginalist 166,

182—Demand and supply approach 186—Opportunity cost-approach 175, 178, 184—Equilibrium theory 166, 186—Modern Theory Ch 10. VIU. Wages 93, 97, 102, 194—-Wage theories: Classical 194— Demand and supply approach 194, 220—-Minimum-of-existence or Subsistence theory 195, 201—Wages Fund Theory i90—Marginal Productivity Theory 210—Criticisms of the marginal productivity theory 220—Marshallian theory 214—Role of trade unions 220— Collective bargaining 214, 219—Role of non-economic factors 227. IX. Interest 93, 97, 102—Theories of the determination of the rate of interest: Classical 229, 246, 255—Criticisms of the classsical theory 231—Marginalist theory 231, 243, 246, 248, 266—Contributions of Smith, Say, Malthus, Ricardo, Senior,

Mill,

Cairnes,

etc.,

232. X.

Profit

93,

97,

102—Profit

Vs.

Interest 229—Theories of

profit: Classical 229, 253—Criticisms of the classical Marginalist theory 254—Criticisms of the marginalist Modern theory 257. XI. The Sraffa Revolution of 1960, 259.

theory theory

231— 250—

|

Foreward There has been in recent years ‘a resurgence of interest’ in the history of economic thought. It would be of dubious value to accept the cpinion that a schism exists between the history of economic theory and contemporary economic thought for there is muchin the latter that could never be understood except in retrospect. Acquaintance with the history of ideas ensures a better appreciation of the significance of the present-day theories. The body of economic analysis is the outcome of ‘along and often painful process of thought’ on the part of several seminal minds over the years. Past and present thinking interact mutually. Theories have grown out of the past and will undergo modifications in the future. Ideas never are virginally new (Samuelson). Every great idea was originated by someone who was not the first to discover it (Whitehead). ‘To trace the affiliation of ideas in the progress of science is calculated to correct one’s estimates of authority... Hence the history of theories is particularly instructive in political economy as in philosophy’ (Edgeworth). A study of the history of opinion is, according to Keynes, a necessary preliminary to the emancipation

of the mind. Joan Robinson advised that one must always view systems cf thought and systems of analysis as integrated wholes. Terms and concepts are crystallizations of important

thoughts.

|

The style or tradition of teaching economics against the background of the evolution of ideas and in historical retrospect has been in vogue ever since the days of Professors E.A. Horne and C.J. Hamilton in Patna College (which later continued as Patna University’s only post-graduate college in Bihar when the university was established in 1917, almost 54 years after

the

establishment

of the

college). My 35 years’ career (to date) as a teacher in Patna College and Patna University has been closely connected with the teaching of economic theory and economic thought. This book has naturally evolved in the course of the teaching and research on my part during this period. These studies (which are essays) in the form purport to be critical

Forevord

1

surveys of and introductions to certain ideas, that is, re-interpretations of and commentaries on the contributions of economists and their schools to certain ideas but the selected number of ideas and theories have been thoroughly studied. Being, in part, a historical investigation, they provide a broad perspective to the ideas and theories included. The accent lies on their evolution and the studies bring out their continuity as well as their change.

These studies explore the development through time of the concepts and analytical tools that comprise the body of economic theory. They dwell critically on the basic topics in economic theory and economic thought. They focus primarily on the development of ideas in the distinctive branches of economic analysis and policy in the sense Robbins used the termsin his earlier works. They are intended to be interpretative studies and are, therefore, presented historically but critically. My book is an admixture of theory and thought. Its purpose is to place the study of certain economic propositions in its proper setting by relating earlier theories to more recent discussions and developments, and thereby contributing to systematic thinking. The structure or gestalt of the classical economic theory is its central theme, and hence the bulk of this book is concerned with the

examination

of the nature

and

scope

of economics

and

of the

different theories from the point of view of the classical economics. But the neo-classical or marginalist economics has not been ignored, and a sincere attempt has been made in the relevant sections to compare and contrast the classical and the neo-classical systems of jdeas, and to arrive at certain judgements and conclusions. To put it differently, this book aims at furnishing an integrative statement of the significant contributions to economic analysis and policy during the classical and the neo-classical periods cf the history of economic thought, with emphasis, of course, on the classical period, though the modern period has not been glossed over. I have drawn liberally on and borrowed profusely from both primary and secondary sources. That is, I have quoted from the original works of the master-minds as well as from the critical studies of their works by modern economists. I have expressed judgements about the various writers and schools but my judgements are shaped largely by those of the critics whem I have consulted. A distinguishing feature (or forté) of my work is that the contributions of the leading economists whom it names and features are examined

from different vantage points.

X

Studies in Economic Analysis and Policy in Retrospect

As stated above, these studies are the record of a process of thinking, researching and teaching extending over three decades and a half. I have taken pains to so revise and rearrange iny studies that they afford an impression of closely connected pieces and hang together. In so far as they were written at different times over a span of twenty-odd years, repetitions of particular quotations, remarks, and even appraisals stayput, despite necessary corrections in the text. Besides, some variations of emphasis are also noticeable here and there in the book. I would hope and pray that my readers condone this demerit and do not fault the work on that ground, considering its merits in other respects. Another feature of this book has to be explained to avoid misunderstanding. It is essentially a selective exercise rather than an exhaustive study of the relevant literature. It makes no pretension to completeness. It is not a full-length text-book. It is a broad survey, and not a comprehensive history. 1 have made no attempt to deal with such topics as methods of economic

analysis, equilibrium,

monetary theory and pclicy, etc.

Also,

I do

not

make

any claim to originality or new contribu-

tions to scholarship. Whatever originality is in it is owing to the arrangement and appraisal of the ideas and contributions of the distinguished economists and their commentators. But even in its existing form this publication may enable the readers to understand better the issues covered by it. So this has more a utilitarian than a scholastic purpose to serve. The assembling and the interpretation of the materials in the present form may perhaps be useful to students (specialist and non-specialist) of economics and other social sciences like commerce, sociology, labour and social. welfare/work, business administration, history and political science because they have been distilled and filtered through teaching. .

I take this opportunity to express

my

general

gratitude

to the

editors of (1) Current Studies, (2) Economic Affuirs, (3) Indian Economic Journal. (4) Journal of Social And Economic Studies, and (5) Southern Economic Review for permission to use some of my

already published articles after revision and reorganisation. My two colleagues (while I was in Patna College), namely, Dr. B.K. Lal and Dr. I.N. Sinha made me read a number of good books on philosophy which they lent me from their personal

libraries. Dr. S.K. Mishra (of the Department of Mathematics) arranged a number of treatises on the philosophy of science for my

Foreword

xe

use from the library of his department.

Some books came

National Library, Calcutta; some others from Calcutta, and the British Council Library, Patna.

o

from the

the USIS Library, I borrowed books

from Patna College library, Patna University library, Sinha library and the libraries of the Patna University Economics. Department and the A.N. Sinha Institute, Patna (through the courtesy of two of my ex students, namely, Dr. M.P. Pandey and Dr. D.D. Guru, who are employed there). To all these persons and the librarians concerned (which include Mr B.P. Mishra and his colleagues— Messrs N.P. Singh, A.P.

Sinha,

Y-P.

Singh,

and

U.M.

Thakur—

Mr S. Ashraf, and Dr. S.F. Rab) are due my grateful thanks. In the fetching and mailing of the typescript and the printed matter respectively, the students occupying my out-houses rendered useful services, Prasad,

and they Ramanuj

are Krishna Kumar, Mahesh Bhagat, Singh and Satyanarain Prasad. My

Thakur research

students, Mrs Meera Mridubhashini and Mrs Neerja Rashmi have each lent me a hand in preparing the index. All these persons have my thanks. Finally, my wife (Mrs Usha Prasad) and my two sons. (Sanjiv and Sachin) have, in multiple ways, taken an active part in the production of this book, for which they are being remembered here most lovingly. I reiterate what I have stated before in my other publications recently that in writing this book, too, I had perforce to depend largely on the locally available sources of information (and the Patna libraries are not so richly endowed as are the Delhi, Madras, Bombay and Calcutta libraries) because I had to bear a'l expenses from beginning to end from my own small pocket. (Even when I draw the maximum salary as University Professor, it is not so fat that Ican spend it partly on my research work as well without making any great sacrifice. My past experience has been so bitter and humiliating that Ihave not had the heart to approach any source for a grant to enable me to meet the huge expenses incurred inthe course of this work. I did very much want to consult experts here and abroad but I have had ro morey for that purpose. One of my old friends from another State told me that, in some universities there, funds were available

for fixtures,

fittings, furnishings, and construction works in the private houses of their topmost functionaries, running into lakhs and lakhs in several cases, for meeting the air fares and other expenses of their vice-chancellors and half a dozen influential teachers who went abroad at least thrice every year to attend conferences, for sanctioning research grants and publication subsidies to particular teachers,

xii

Studies in Economic Analysis and Policy in Retrospect

several thousands per year per person, to be kept by them in banks under the double-deposit scheme without their writing any papers or without their theses or learned works ever seeing the light of the day, and for the half a dozen institutes and centres which were mere one-man shows, whose directors and their henchmen controlled everything and spent most of the funds on their own prcmotion and advertisement, but there was no fund at all for supporting the research works of those university teachers who were truly devoted and dedicated to them (and being a university professor was a disqualification as that meant that he or she did not need any such financial support in view of his or her maximum salary). I think Iam

then

more

fortunate,

for

at least in 25 years I have received

a total of Rs. 5,000/- as research grants and another total of Rs. 10,000/- as publication subsidies for my two previous books from my university. —_

——

=

—-

This book is my humble offering to the already existing literature in economics. One can only work but one can never be sure of how one’s work will be received. Our old values have partly altered and partly perished after Independence. Recognition or success in this country has lately come to be measured by political appointments to prestigious offices and posts, simultaneous membership of a plurality of committees, commissions, councils, boards, panels, etc., ‘with their headquarters preferably in Delhi, representation on powerful academic and administrative bodies either through elections (which are generally games of manipulation) or through nominations (which political powers often control), election to the offices of allIndia learned societies without claims (when the politics of money and

muscle powers become supreme) or with claims (which is becoming very rare), sojourns abroad several times in a year at public cost whether participation in the international conferences is realiy worth-

while or creditable (in many cases by means of tacit negotiation with the authorities and friends overseas), earning of enormous money through private tuitions or by running coaching institutes or by producing sub-standard text-books or guess-papers or guide books or even by monopolising a few perk-carrying part-time offices in the ‘same institutions where the concerned few privileged persons work, or by doing consultancy work for several outside agencies at the same time. Universities are fast yielding their place to institutes and one-man (‘lone-wolf’) publications and ripe teaching experience are gradually succumbing to the reports on field surveys published by

Foreword

xilt

the directors of institutes working with teams of assistants the field survey directing experience respectively. The

and to nation’s

gems are now being drawn mostly from the institutes which they spawn themselves and on which the state now disburses proportionally a lot more than it does on the universities, and the former are believed to provide and mill better fiduciaries on

behalf of the government. —_———

—

—— =

es

a

ee

ee

I dedicate this book, first, to the memory of my revered mother, Shrimati Vindeshwari Devi. She left us over twenty-one years ago. I have missed her ever since. She loved me most, and taught me to discriminate between what is good and what is bad. My

only regrets have been that I could not even

not do anything for her.

at her bedside when her end came.

Mother

I was

was

a very

good-natured woman, like my great grand-mother, and was of a pleasant temper, and pretty tuo. I dedicate this book, next, to the memory of my revered grandfather, Shri Sheokumar Dutt (alias Shri Achintya Lal), who was

another

powerful

influence

in

shaping

my

moral

life.

For him the roots of welfare Jay in truth. He could have ~ done better in politics (he was a contemporary of the late Dr. Rajendra Prasad, the first President of the Indian Republic, in Presidency College, Calcutta) but he opted for business (which ultimately became bankrupt), occasional literary work (he wrote poems and novels in Hindi, a couple of which were published in the

late 1890s), and social reform work. One of his business establishments was located atthe same site asthe Patna Basic Training School of today.

I dedicate this book, finally, to the memory (sad, though) ofa school teacher of mine (unrelated to me) who taught me the first grammar of social science and whom I propose Mr G, without disclosing his full name for obvious reasons.

to call Mr G

was very popular with his students. He was well-informed, had originality, and taught them with considerable proficiency. Out of their great respect and affection for him, his students addressed him as Uncle. Uncle G was generally of a peaceable temperament, but when be was unnecessarily provoked, he would flare up and was

almost beside married late.

A story always

himself with rage, and then could do anything. He Auntie G was in her late twenties when they married.

floated wanted

thinking that

about to

she

their have

would

marriage. a

be

It said that Uncle

well-educated an

asset

girl

as

in his academic

his

had bride,

pursuits.

xiv

Studies in Economic Analysis and Policy in Retrospect

Auntie came of an average farmer’s family, though quite progressive in its outlook. As she was the eldest child of her parents, too much love and attention had spoiled her. She was obstinate and peevish, and given to over-rating herself in respect of everything. “She soon developed into a quarrelsome girl, anda quarrelsome working woman, and proved a trouble-shooter and a destabiliser, and had. in consequence, to move from office to office after her rows with the managements. Partly for this reason the partics that came to see her lost no tine in rejecting her on coming to

know of her

adverse

antecedents, one after another.

This made

her parents and other close relations desperate. Uncle too had got ascent of thisjust on the eve of their wedding but he somewhat entertained the fond hope that she should be all right subsequent to their marriage. And in this Uncle was absolutely mistaken. It was rumoured that the two had quarrelled on the wedding night, and practically every day afterwards for nearly thirty years, when his sudden death had put a stop to their incessant bickering. Thus Uncle had paid heavily all his life and career for his unique choice. Their marriage had proved a perennial source of unhappiness and discord to both. The two had not the slightest understanding between them on any isste, big or small. Auntie engineered a situation that put much strain and pressure on both of them. Uncle complained that she had conducted herself in a manner characteristic of shrews, witches, and vixens. Both had used an outrageous and intemperate vocabulary, typical of vampires. But the provocation had invariably come from her (owin: to her lethal words, caustic remarks, and high-handed deeds, beyond the limits of

any man’s endurance) and led to a most fierce and militant duel and an internecine exchange of threats of dire consequences (such as ‘desertion’, ‘throwing out’, ‘killing’, and ‘sucking blood’). Both

regretted their marriape. Both accused

each

other

of inattention

and indifference, mental cruelty and torture as well as even the ruin of their career and health (particularly Auntie, who queeriy thought that by further waiting, she might have surely

married some Prince Charming as some of her co-evals We,

who

impression

were

that

very

intimate

with

Auntie had gone

the

family,

had

done).

somehow got the

through with the marriage under

extreme helplessness, and as such was never reconciled to it. She had always a feeling of being up-rooted, disgruntled and discontent-

ed. Her vituperation and animosity appalled Uncle constantly. We could not make out what Auntie had meant by charging, time and again, Uncle with duping her into the holy union with himself

Foreword

xv

by telling half a dozen lies insofar as theirs was not a love marriage; it was an arranged marriage just as many have in India. The

atmosphere in the house

remained

worship. Uncle’s little, occasional soul, whereas the set-backs and

refractory

to

‘successes sent rebuffs often

both

work

iron into sustained

him pleased her immensely. His casual intellectual were an eye-sore, an anathema to her, but the modest which they yielded irregularly were readily grabbed bv was nagged and vexed, harassed and haunted by

and her by

activities dividends her. He her like

an evil spirit. She saw no merit, no ability, no. character in him. To her, he was a liar, a thief, a duffer—first a waif and then

a monster. She spared no means to blight his spirits and to lower his sights. His academic projects caught her evil eye from the right beginning. Whenever fresh responsibilities devolved upon him, she tried to create further disturbance and disquiet in the home. During the exceptional days ina year when they were on speaking terms with each other, she took all

credit for his so-called

recognition because that would not have materialised, had she not herself cooked and served him the meals he was constrained to gulp down in silence and unattended. Auntie was in total control of the purse and the meagre savings which accrued intermittently. Any purchase by Uncle was forbidden, and if ever he was compelled by

circumstances to purchase the few articles of his dire necessity, they were scoffed at (just as were the presents brought to him by his few friends and well-wishers) and removed to the toilets. The day would commence with Auntie kicking at and dislocating the furniture and articles Uncle used, and would often end with Uncle sleeping on an

empty stomach, to her great satisfaction. Disapproval and disgust, intolerance and irritancy were writ large on her face and reflected in her speech and actions all the twenty-four hours. If ever Uncle attempted to chide the children for neglecting their studies, Auntie would object strongly, as if he were their step-father. In sharing most of the daily needs of life, Uncle was a mere residual claimant; even domestic servants were taken care of better elsewhere. Uncle was estranged from his friends and became a recluse and brooded over his luckless marriage when he had leisure. Visitors were excused away on one pretext or another. But those few who came unexpectedly felt bored with the same tale of her insufferable existence that was narrated at every meeting, when they told that even the local flowers smelt.of rats. She had a three-point programme: To keep Uncle disturbed and deconcentrated, to cause a rift between him and the children and to demolish his image

xvi

Studies in Economie Analysis and Policy in Retrospect

and erode his authority, and to hold him responsible for the awful mess into which the home had fallen. All the same, nobody could ever deny that Auntie was a very hard-working and competent house-wife, and kept the house and ran it single-handed (even if for the sake only of the children) but she undertook all those hardships not as part of her duties put as uncompensated favours done to Uncle. When the exertion proved excessive,

and never standards

come

she

hurled

refrained of the

such

work

abuses and curses

from

great,

was

reminding affluent

infra dig.

at her marriage with him,

him

estate

As

of the fact that by the from

which

she

had

years rolled by, she became

more wicked and vindictive, and still more bellicose and

belligerent,

fiery and irascible, hot-headed and high-strung, unforgiving and unforgetting, more selfish and thankless. Their suffering was compounded during spells of sickness they had, the frequency of which increased with their advancing age, whilst they were drawn farther and still farther apart.

The same ire, bile and venom

Auntie used to torment

and scorch Uncle for years on end eventually turned her physical frame into a veritable store-house of several wasting diseases—her system refused to contain their excessive output. She had always prayed for widow-hood and impatiently waited for the day Uncle would be struck down with some terrible disease and she would desert him, thereby dealing the maximum blow at him. But that day did not arrive at all, and Uncle died abruptly of a heart failure. Ere long, she rendered herself abominable to the junior members of the family, and met with a most miserable end, and that was how God wreaked retribution upon her. May their souls rest in eternal peace.

Let the economists continue their search for truth so as to endow society with maximum love (the noblest of all human passions and the most valuable object of mankind) and to do maximum good to it. Let them remember that whereas truth is not divisible, love and good are. Let them know tbat if there have appeared suddenly in a normally progressing system the seeds of its retrogression, then the principle of life or of Nature suggests that there must co-exist amidst or adjacent to those very seeds some such kernel, matter,

element or property as is capable of not only arresting that retrogression but also of regenerating the whole system, and it is the foremost task of human ingenuity and consciousness to look for it and to locate it successfully. K.N. Prasad

CHAPTER

ONE

‘i

Classical Approach to the Nature of Economic Science: An Appraisal The term ‘Political Economy’ occurred in 1615 in the title of a book written by a French hardware manufacturer, called Montchretien. Political economy was not systematic or specialised during the mercantilist period; everyone was his own economist. It was then problem—or policy-oriented. Needless to say, mercantilism was neither a scientific school nor scientific theory. It was an exercise in statecraft; that is, it was meant for guiding the state in achieving a favourable balance of trade. Economic well-being of a nation rested on such a balance, i.e., the

stock

of money

gained.

Besides,

the mercantilists were interventionists, for they wanted the state to meddle with the affairs of trade. The physiocrats developed their world of ideas in the course of their discussion of topical problems concerning economic policy. The practical man and the philosopher united in the investigation of the basic theoretical truths by them. In other words, they were economic statesmen. They studied the economic phenomena of society as a whole and made general statements about their causal relationships. Their chief interest lay in giving an account of how the net product was distributed among the

social

classes,

productive class (the farmers), the rentier class (the

viz.,

the

landlords) and

the sterile class (the artisans). The political elements in their economic reasoning had an obviously ‘‘metaphysical character.” They had an abiding faith in the ‘natural order’ or a ‘divine plan,’ as ordained by natural law and as controlling social growth. They were non-interventionists. They believed in certain norms and wanted men to strive for their attainment. They concerned themselves with two major objects of economic analysis, namely, resource allocation and level of economic activity. They held that these two economic categories were inter-connected. According to them, maximum output depended on the pattern and the continuity of consumption and on the employment of a sufficient proportion of

mobile resources in agriculture and activities allied to it, all capable of yielding a net product. To sum up, in the hands of the physiocrats like Quesnay political economy was nothing better than ‘a system of rules and regulations’. The physiocrats furnished ‘‘a vivid picture of economic '

2

Studies in Economic Analysis and Policy in Retrospect

life, of its subordination to fixed laws, and of its interlacement with the social process as a whole.’ The entire development of the physiocratic system was ‘‘based on the pre-supposition that its doctrines were deducible from a particular philosophy, the rationalist and individualist philosophy of the Enlightenment.” The apostles of that movement, believing as they did that social life was conformable to natural law, conceived the pursuit of self-interest to be the principal motive-force of economic activity and, consequently, expected that individual freedom to pursue self-interest would result in a harmonious development of economic life. The foundations of physiocracy lay in the individualistic view of economics and the notion that economic activity is subordinated to the laws of a mechanical causation. The deductive method developed from the basing of economics by the physiocrats on the motive of selfinterest working like a mechanical force.

Several authors maintain that both the mercantilists and the physiocrats treated political economy as a practical art and asa guide for the statesmen and the administrators. With them, it was just a system, not a science. It consisted of “‘ad hoc enquiries.” Marshall notes that ‘‘the first systematic attempt to form an economic science on a broad basis” was made by them. Schumpeter too is of the opinion that the basis for a modern theory of economics was firmly established by them. However, the physiocrats fell into a confusion of thought, as Marshall alleges. They ‘‘confused the ethical principle of conformity to Nature, which is expressed in the imperative mood, and prescribes certain laws of action, with those causal laws which science discovers by interrogating Nature, and which are expressed

in the indicative mood.’’ But Marshall admits that they gave to economics ‘‘its modern aim of seeking after such knowledge as may help to raise the quality of human life.” Coming to the classical period, we find that the classical economists sought the great eternal truths and the laws of history. Modern price economics appears as ‘‘pedestrian stuff’? compared with their themes of enquiry. They all emphasised the autonomy of economics. Most of them stressed its analytical or scientific character. The leading ones among them confined themselves to economic analysis.

A belief in the natural law was an article of faith with the classicals. By the term ‘law’ or ‘natural law’ they meant what Marshall’ called “‘statements of tendencies.”” There was nothing providential about natural law and the classicals paid “‘lip-service to the providential quality of the natural order” which they delineated. They isolated the economic phenomena (or motives) and abstracted from the non-economic ones. They used the principles of isolation

and abstraction for the purpose of carving out the domain of purely

economic research. In this they were faultless and above reproach. They made tremendous contributions to the advance of their science by providing a method of analysing the economy and the economic

Economic Science: An Appraisal

3

laws which operated within it. They gave “‘the best analysis of the economic world up to their time, for surpassing the analyses of the mercantilists and the physiocrats. They laid the foundation of modern economics as a science, and the generations that followed

built upon their insights and achievements.” Were we to accept the viewpoint of Haney, then we have to admit that the physiocrats’ attempt at formulating a: body of positive principles, separate from morals, politics, and jurisprudence, gave economics ‘“‘its first claim to be a science.’’ Smith later clinched that claim. In his book, economics became associated with a body of causal explanation of economic phenomena and the price system became the basis of economic science. Professor Robbins has argued at length that the classical analysis was scientific. It was definitely argued. It was not stated dogmatically. Common experience was its basis. Each stage of argument was illustrated by appeal to fact.

It appealed to general uniformities rather than particular instances. It presented principles of explanation applicable to a wide variety of cirumstances. In short, it assumed the form and the objectives of a science in the Kantian sense. It passed from “a series of ad hoc enquiries’’ to ‘‘an analysis of general inter-connections.” The classicals were never tired of pinponting the fact that

the conclusions

of economics

rested ultimately on the postulates

derived as much from the observable laws of production as from subjective introspection. They debated among themselves on the realism and relevance of the underlying assumptions of their theories. Everyone seemed to suggest that the predictions had to be checked against experience and everyone seemed to subscribe to the view that the theories should be capable of being falsified, for falsity was the hall-mark of a science. But no real effort was made in practice by anyone to propound such theories. Every contradic-

tion in a theory was attributed to the disturbing causes or counteracting tendencies. These were equated with the exogenous variables, for example, technical improvements, workers’ attitude to the size of family, supply of entrepreneurship, and the like. A longterm point of view was generally adopted. Without the postulate of natural or universal laws, the classicals

“no

collection

of truths, however

appeared

well attested,

to

aver

could ever

that

lay

claim to the title of science.’’ But such laws had none of that ‘providential’, ‘finalistic’ and ‘normative’ character so frequently dwelt upon by the physiocrats. To the classicals, these laws were comparable to the physical laws and were clearly non-moral. ‘To say that political economy is a ‘dismal science’ because it shows that certain laws may have unfortunate results is as absurd as it would be to call physics a dismal science because lightning kills.’’ Such was the view that prevailed.

_

The classicists claimed that social phenomena, including history, had laws of their own, which could be discovered. They tried to present a complete picture of the economic process. Their picture,

4

Studies in Economic Analysis and Policy in Retrospect

abstract as it was, was yet full of the guintessence of reality. In short, they theorised in order ‘‘to straighten out points that involThey assembled facts whenever ved some logical complications.”” they thought it useful to do so. Kolthammer writes, ‘‘In the early years of the nineteenth century

men breathed the air of deduction. Science was the bodiless creation of logic. Starting from one or two simple propositions, reason proceeded to deduce cogently and inevitably therefrom a whole system of laws, relations, and consequences. Given that the method was sound, and its employment faultless, the only source of

error must obviously lie in the first elements, the principia, whence reason hatched her brood. This was the plan on which Bentham, Austin, and Mill, the elder, did their work; the mode which Ricardo adopted.’’ It is asserted by many that the classicals were aware of the distinction between ‘science of economics’ and ‘art of policy’ and, in practice, they were ‘purveyors of recipes’. Moreover, they considered their policy recommendations to be scientific results which followed automatically from scientific, if not purely economic, analysis. It is unnecessary to point out that materialistic utilitarianism and individualism found expression in the advocacy by the classicists of a body of rules of action, which is the art of applied economics. We find that, in fact, the classical theory is blended

with

parti-

cular political maxims and principles. As a matter of fact, it evolved from humanities and moral sciences. It was characteristically teleological, as Robbins labours to demonstrate. Like all analysis of conduct it ranin terms of, purpose. The stimulus to much of the abstract analysis noticeable in it welled from the

classicals’ interest in the practical problems of their day. It conjoined to the ‘‘teleoJogical and meliorative view of the social order a utilitarian psychology.” The theory of economic policy in the classical political economy was a theory of economic and social reform. It was based on ‘a systematic body of scientific knowledge.’ Its prescriptions were derived partly from ‘a systematic enquiry into the nature of economic relationships and their mode of development in different types of circumstances.’

It paid regard also for the probable

consequen-

ces of particular measures or policy recommendations. This regard was based on ‘a comprehensive analysis of the economic system as a whole.’ This is, in brief, what Robbins pleads. On the other hand, the Marxians and the German historians had argued that the scientific basis

was

“‘just a facade.”

of the

But Robbins

classical

political

is emphatic

economy

that it was, in

essence, ‘theological’ or ‘mystical.’ Its claim for economic freedom was based on ‘“‘metaphysical preoccupations of how the world ought to run rather than on scientific analysis of how it really would run He notes further that it if the conditions assumed were present.’ is the simile of ‘the Invisible Hand’ used by Smith that gave.

‘‘extensive hostages to superficial criticism.”

He quotes approvingly

Economic Science: An Appraisal

a

Keynes, who points out that the classical tradition was ‘“‘marked by a love of truth and a most noble lucidity, by a prosaic sanity free from sentiment or metaphysic, and by an immense disinterestedness and public spirit.”” Robbins speaks eloquently of ‘‘their integrity and transparent devotion to the general good.” The fact, however, remains that the classicals were social reformers and addressed their works to the burning questions of their times. They shared the ‘stick-in-the-mud’ practical man’s abhorrence of ‘amusing theoretical toys.’ They made their reasoning part and parcel of a general system of social ideas. They acted as judges. They took a prominent part in the fashioning of policy. They maintained that a theory of economic policy, in the sense of a body of precepts for action, must take ‘‘its ultimate criterion from Outside economics.” They found this test in ‘the principle of utility... They wanted all action, all laws, all institutions to be judged by this test. No laws or institutions were sacrosanct in themselves. All were subject to the test of ability to promote human happiness. The classicals were ‘individualistic utilitarians.’ They believed that what was ‘greatest happiness’ was not imposed from outside. It was a happiness to be judged by the individual concerned. Such individualism was a norm of classicism. The classicals’ individualist norm did not involve a denial of the existence

and

necessity

of

meeting

communal

needs,

such

as

defence, street lighting and sanitation. It did not either involve denial of the utility of ‘paternalism’ in respect of children and backward peoples at least temporarily during the years of transition. The classicals were individualists as regards both ends and means. They believed in positive state action. They never conceived of the system of economic freedom as arising in vacuo or functioning in a system of law and order so simple and minimal as to be restricted to the functions of the night watchman. They wanted to make private monopolies public property. They delegated to the state education and care of the old and the children. They approved of state intervention in those areas where self-interest was un-enlightened, such as employment of children and prospective mothers. The tone of their proposals for economic reform was not only ‘“‘persuasive and moral’ but also at once

‘‘sentimental

and

austere,’”’

with

“the flourishes of abstract theory kept in check by a desire to preach social amelioration”, as Blaug elucidates. We may profitably reproduce here a point made by Robbins: “Viewed as a system of prescriptions the chief aim of classical

thought was the improvement of the condition of the people, especially the labouring classes . . . the ultimate intention of policy was whether in the long run it tended to arise in the equilibrium level of wages.” From this it should not be inferred that the classicists were revolutionaries. They did not advocate a violent over-throw of governments, nor did they espouse the total abolition of the historic basis of society. They were mere critics of some existing institutions and habits. They had definite proposals for what they deemed to be an ‘improvement,’ which they fervidly advocated.

6

Studies in Economic Analysis and Policy in Retrospect

According to a study by Myint, on balance, the classics were concerned more with the problem of increasing the total physical output, which is a technical problem, treated at the physical level of analysis and less with that of maximising consumers’ satisfactions by choosing between alternative methods of using given resources, which is an economic problem treated at the subjective level of analysis. In Blaug’s estimate, the function of the classical economic analysis was to reveal the effects of changes in the quantity and quality of the labour force on the rate of growth of aggregate output. It examined effects of increase in the quantity and quality of resources on economic development in an environment in which wants expanded dynamically. On this estimate, the allocative problem is present in Smith as well as Ricardo (see the latter’s chapter on foreign trade). But the problem of growth and development is met with more in Smith than in Ricardo. Were we to define economics as ‘an engine of analysis’ or as ‘a method of thinking ratber than a body of substantive results, then Ricardo is certainly unequalled.

Another notable feature is that the classicals were pre occupied with the levels of incomes, both absolute (rates of rents, wages and profit) and relative (proportions or ratios of rents to wages and wages to profits). This Cannan dubbed as the genuine distribution problem. The value problem came to be appraised as second in

importance to the distribution problem. That is to say, the former was looked upon as a by-product of the latter. There was no discussion in the classical political economy of either personal or functional income distribution as found in the neo-classical economics (which Cannan branded as a pseudo-distribution problem). The third characteristic feature of the classical political economy was that it studied the crowd, and not the individual. Finally, Smith, Say and James

Mill focussed

their

attention

on

the causes which made production per head greater or lesser. Theirs was, therefore, an enquiry into the nature and causes of wealth. Robbins comments that ‘“‘classical thought, whether on matters of theory or on matters of policy begins, not with Malthus and Ricardo but with Hume and Adam Smith.”’ He adds, ‘‘In particular, it is a fatal mistake to regard the Ricardian system as something coming into the world de novo with no background of common assumptions. which it shared with its predecessors and no spur to speculation save the native intellectual force of its inventor. There is a vast extent of analysis and prescription which the generation of Malthus and Ricardo more or less takes for granted, the essential work having been done by Hume and Smith; and a great deal of what they do themselves is to be regarded, not as a series of propositions thought out in a void, but rather as an attempt to correct or improve propositions and explanations which are already to be

Economic Science: An Appraisal

7

found in the Wealth of Nations.’ Robbins further adds that Mill avowedly took the scope of the Wealth of Nations as his model, for “anything less would have failed to reproduce the essential basis of the classical outlook.” The goal of political economy, as set out in the Wealth of Nations, was “‘to increase the riches and the power of a country.”’ In Smith’s book political economy became a natural science based on the observation and analysis of the given facts. Smith tried to approach economic phenomena as a scientist. For him the society was fundamentally a living organism. In the Smithian exposition the laws that regulated the formation of exchange value were also the laws which explained the creation of wealth. They were, in fact, the laws of political economy or the fundamental laws of economic motion. Smith made the theory of

prices the fulcrum

of economic theory in general.

Put differently,

this implies that the laws of prices were also the laws of distribution. Spann believes that in the Wealth of Nations economic life appeared as ‘‘a concatenation of processes of exchange’, and not as a “concatenation of economic functions and institutions’? that one comes across in physiocracy.

Emulating the example of Newton, Smith starts off by laying down a principle which governs the behaviour of the economic micro-units. This is ‘“‘the extremum principle’? which, according to Lowe, is one of the two prerequisites of the law of supply and demand, the other being ‘‘stabilising expectations.”” This principle is the economic counterpart of the Newtonian law of universal gravitation. It matters very little whether this principle is interpreted as an expression of a basic feature of invariable human nature or is taken as a heuristic principle of purely explanatory and theoretical significance, as Gurwitsch endeavours to argue. In both Newtonian science and Smithian political economy the macrocondition of the system results inexorably from the behaviour of the members of the system. Both apply the hypothetico-deductive method by considering a law of micro-behaviour andthe initial state of the system as known. Both try to deduce this from the laws of motion of the system and its future states.

Smith possessed ‘‘unsurpassed powers of observation, judgement and reasoning.”

He was the first to write a treatise on wealth in all

its prime social respects. As McCulloch put it, ‘The Wealth of Nations was the first work in which the science was treated in its fullest extent, and in which the fundamental principles that determine the production of wealth were established beyond the reach of cavil and dispute.’ Smith always worked his way towards the truth, although ‘the had not quite got rid of the confusion prevalent in his time between the laws of economic science and the ethical precept of conformity to nature.” Sometimes he regarded it as the province of the economist to expound a science, while at others, to set forth a part of the art of the government. When he sought for causal laws, he used

scientific

methods,

But

when

he uttered

practical

8

Studies in Economic Analysis and Policy in Retrospect

precepts he generally knew that he was only expressing his own views of what ought to be, even when he seemed to claim the authority of nature for them. He was the first to make a careful and scientific inquiry into the manner in which value measured human motive. He saw distinctly that while economic science must be based on a study of facts, the facts were so complex that they generally could teach nothing directly; they must be interpreted by careful reasoning and analysis. He ‘‘did not very often prove a conclusion by detailed induction.” ‘‘The data of his proofs were chiefly facts that were within everyone’s knowledge, facts physical, mental and moral. But he illustrated his proofs by curious and instructive facts; he thus gave them life and force, and made his readers feel that they were dealing with problems of the real world, and not with abstractions; and his book, though not well

arranged,

is a model of method”’ (Marshall). It follows from the foregoing that Smith sought to arrive at generally valid and applicable knowledge by a universal study of historical facts and forces. But there was always something of the reformer in Smith’s attitude. The Wealth of Nations is utilitarian in its hard core. It is devoted to ‘expediency’, as Mrs Robinson points out. Hume was the original fountain-head of utilitarianism. Bentham’s ‘felicific calculus’ was an attempt in that direction. Both Hume and Bentham were concerned with ‘‘the sphere of broad appraisals rather than quantitative computations.”’

Say regarded political economy as an observational science but called it experimental (meaning by it empirical). In his work it became a purely theoretical and descriptive science. The role of the economist, like that of the physicist, was not to give advice but simply to observe, to analyse and to describe. In a letter written to Malthus in 1820 he spoke thus of the economist, ‘‘He must be content to remain an impartial spectator. What we owe to the public is to tell them how and why such-and-such a fact is the consequence of another. Whether the conclusion be welcomed or

rejected, it is enough that the economist should have demonstrated the cause; but he must give no advice.’’ The laws of economics, like those of physics, were not the work of men. They were derived from the very nature of things. They were not established. They were discovered. They were universal, and were not bound by time and space. Like physics, political economy was not concerned so much with the accumulation of particular facts as with the formulation of a few uniformities. Malthus considered political economy to be ‘a science of tendencies’. He criticised Smith for placing too much emphasis on the production of wealth, and not enough emphasis on its distribution. He believed that man, like the soil he cultivated, was so variable that political economy approached more nearly to the sciences of morals and politics rather than to the strict science of mathematics.

Economtc Science: An Appraisal

9

Ricardo was not a utilitarian. His busy and positive mind had no philosophy or sociology at all. There were no ‘‘ideological overtones or any smell of wishful thinking’ in his pursuit of absolute value. He battled with ‘‘an honest intellectual puzzle.”’

His interest in value and distribution originated from his interest in the Corn Laws. In his opinion the determination of the laws regulating distribution was the principal problem in_ political economy. His book ‘“‘formed a new era in the history of the science.” It did utmost to unfold the mechanism of society and to perfect the science. Marshall spéaks very highly of his ‘‘strong constructive originality,” his ‘‘power of threading his way without slip through intricate paths to new and expected results,” his ‘‘aversion to inductions” and his ‘“‘delight in abstract reasonings.’’ He preferred ‘“‘broad principles, consonant with general experience, to particular inductions from select groups of facts.’ But ‘this knowledge was one-sided: he understood the merchant, but not the

working

man.

For the sake of simplicity of argument he often spoke as though he regarded man as a constant quantity devoid of variations.”’ He ““attributed to the forces of supply and demand a much more mechanical and regular action than is to be found in real life” and laid down laws with regard to profits and wages that did not really hold good even for England in his own time. What was the worst, he did not see how liable to change were habits and institutions. The contrasts between ‘‘the intellectual gifts’? of Malthus and Ricardo were, in the words of Keynes, ‘‘obvious and delightful’’: **In economic discussions Ricardo was the abstract and a priori

theorist, Malthus the inductive and intuitive investigator who hated to stray too far from what he could test by reference to the facts and his own intuitions.” Ricardo investigated the theory of the distribution of the product in conditions of equilibrium; Malthus is concerned with what determines the volume of output day by day in the real world. Ricardo’s theory seems to be an everlasting justification of the status quo. But the socialists interpreted his ‘‘crude expressions” to their own advantage. They became ‘‘the tool-chest of several political parties, the raw material whence many different twists were spun. ...A harsh conservatism and a perhaps harsher J/aissez-faire; a constitutional meliorism and a revolutionary anarchism—these all find their source in Ricardo. McCulloch, Senior and Mill,

of his limitations, yet not built on his foundations.”

comparing

aware

his assumptions with facts,

James Mill regarded political economy as a science of husbandry or ‘‘state house-keeping.”’ He desired to give ‘‘increased sharpness of outline to the abstractions of the science.’’ He comprehended enquiries into four sets of laws regulating separately production, distribution, exchange and consumption of commodities.

10

Studies in Economic Analysis and Policy in Retrospect

Marx was deeply interested in the laws of motion of capitalism. He alone believed that capitalism was but a historical phase. His Capital was ‘“‘the pure milk of Ricardo’s doctrine, developed and interpreted by a brilliant disciple, with a fire and venom and skill in practical illustration which the master himself never equalled.” Senior excluded from his political economy factual analysis and treatment of welfare problems. He conceived of the task of the economist as purely positive and analytical. The economist might not advise even though he was explaining principles which the legislator and the statesman would probably have to take into account. The problems of welfare were solved by reference to diverse, other considerations, besides economic ones. Decisions were

made in practical life by men qua statesmen, not qua economists. Because political economy was not a perfect science, an economist could comment on the practical issues only on the basis of his own interpretation of the conclusions of the science. In another language, in Senior’s opinion there was no room in political economy for the comparative judgement of the moralist. He was opposed to all value judgements. The economist’s conclusions did not ‘‘authorize him in adding a single syllable of advice.” But by this he did not imply that the economist was debarred from presenting practical advice. Practical advice presupposed ultimate valuations but these were extra-scientific by nature and beyond the pale of scientific proof. Both Cairnes and Sidgwick concurred with Senior, as we would show presently. J.S. Mill declared physical sciences to be the proper models for economic theory. He distinguished the laws of value (which were comparable to those of physics) from the laws of distribution (which were matters of social policy). He wrote, ‘‘There is nothing in the laws of value which remains for the present or any future writer to clear up.’’ He compared political economy to geometry. ‘‘Geometry proposes an arbitrary definition of a line. Just in the same manner does political economy presuppose an arbitrary definition of a man,” who strives to maximise his utility. Mill adjudged political economy to be ‘‘a branch of abstract speculation.’”’ According to him, science was concerned with facts, whereas art with precepts. In his letter to Lowe he said, ‘‘So far from being a set of maxims and rules to be applied without regard to times, places and circumstances, the function of political economy is to find rules which ought to govern any circumstances with which we have to deal— circumstances which are never the same in any two cases.’ He was consistently aware of the fact that institutions and customs were not immutable.

In his Essay on Economics and Society Mill

made

it abundantly

clear that, for purposes of practical recommendations, the use of the abstract propositions of the science, as its author conceived it,

needed to be supplemented by other knowledge. Inthe world of reality there were many disturbing circumstances which did not fall within the province of political economy. And here the mere

Economic Science: An Appraisal political economy,

11

economist, who if he attempted

had studied no science but political to apply his science to practice, would fail. Economic knowledge was not self-sufficient, if not backed by practical instincts and common sense. ‘‘Except on matters of mere detail, there are perhaps no practical questions, even among those which nearest to the character of purely economic approach questions; which admit of being decided on economical premises alone.”

Moreover,

‘‘we

cannot

too

carefully

endeavour to verify

our theory by comparing the results which it would have predict,

led us to

with the most trustworthy accounts we can obtain

of those

which have actually been realised.” In his Autobiography Mill wrote, ‘‘Political economy, in truth, has never pretended to give advice to mankind with no lights but its own; though people who knew nothing but political economy

(and therefore knew that ill) have taken upon themselves to advise, and could only do so by such lights as they had.” His own watchword was Goethe’s ‘many-sidedness’. He treated political economy ‘not as a thing by itself, but as a fragment of a greater whole; a branch of social philosophy, so interlinked with all the other branches,

that

its conclusions,

even

in its own peculiar province,

are only true conditionally subject to interference and counteraction from causes not directed within its scope while to the character of a practical guide it has no pretension, apart from other classes of considerations.” This is why Mill endeavoured to formulate an economics in harmony with political philosophy. His Principles were examined with reference to their ‘‘applications to social philosophy.’’ He told a friend, ‘“‘I regard the purely abstract investigation of political economy as of very minor importance compared to the great practical questions which the progress of democracy and the spread of socialist opinion are pressing on.”’ According to Cairnes, only wealth constituted the subject-matter of political economy, which was a science in the same sense that physics, chemistry and biology were. The aims of political economy were not practical but scientific. Political economy was a hypothetical science. Its doctrines purported to explicate ‘‘nor what will take place, but what would or what tends to take place.”’ They were drawn ‘“‘from the world of matter end from that of mind.” The end of political economy was “‘not to attain tangible results, nor to advance

any practical plan, but simply to give light, to reveal laws of nature, to tell us what phenomena are found together, what effects will follow from other causes”? In relation to politics, political economy was neutral and therefore not bound to any of the ‘“competing social schemes.” It was neutral in the same way as the study of mechanics was neutral in relation to alternative methods of building railways or in the same way as chemistry remained neutral in the face of various sanitary projects.

Sidgwick doubted that the practical economic questions, which were presented to the statesman, could be ‘‘unhesitatingly decided

12

Studies in Economic Analysis and Policy in Retrospect

by abstract reasoning from elementary principles.’ Their right solution presumed ‘‘full and exact knowledge of the facts of a particular case.”” These facts were not easily ascertainable, with the result that ‘‘positive conclusions by any strictly scientific procedure” would not be ascertained. ‘‘At the same time, the function of economic theory in relation to such problems is none-the-less important and indispensable; since the practical conciusions of the most theoretical expert are always reached implicitly or explicitly by some kind of reasoning from some economic principles; and if the principles or reasoning be unsound, the conclusions can only be right by accident.” It is Ricardianism which the German historical school criticised vehemently and insinuated that abstract laws in economics were both invalid and useless and urged that economists must concen-

trate

on

historical

research

and

examine

critically the extent to

which economic phenomena were governed by natural laws and regard economics as an_ ethico-psychological discipline. They desired that economics must be used as atool for social reform. This school ‘‘took the professor out of the ivory tower and gave him the task of convincing statesmen of the wisdom of their theories.””

To

it, economics was

a dynamic study and as such was

concerned with the observation of economic changes in societies through time. The viewpoints highlighted by it were: relativity, unity of social life and inseparable connections between its elements, anti-rationalism (whereby man was regarded as a bundle of motives), evolution, interest in individual correlations and organism. But Eucken considers it wrong to contend that the historical aspect of economic life was unknown to the classical economists and that, consequently, they succumbed to a kind of theoretical absolutism.

He shows that this is an invalid criticism. The classicists were ‘‘the products of the Age of Reason of the seventeenth and eighteenth centuries, an age by no means ignorant of history, although it asked

different questions of it than did the nineteenth century.”’ They looked among the variety of actual historical economic systems for the one natural system and found it in the competitive one. The historical school was unable to understand this attitude.

The main defect of the classical view, according to Spann, was “the severance of economics from the indivisible whole of society, and the assumption that there exists an undiluted instinct of ‘selflove’ or ‘self-interest’.”” Spann has in his mind Comte’s theory of consensus which emphasised the interdependence of all social phenomena and the importance of induction for testing premises. Comte treated economics as a branch of sociology. Spann repudiates “the isolative and deductive method’’ of the classicals and disallows ‘the moral neutrality of economic activity” assumed by them. To be articulated into an organic whole the concept of Economic Man must, on this view, always connote ‘‘something very different from acting upon purely subjective and profit-seeking motives’’; it must signify action in unison with the premises of ‘‘the extant economic aggregate and participation in the life of an economico-social, and therefore moral, whole.”

Economic Science: An Appraisal

13

Eucken alleges that it was the lack of a clear perception of the Great Antimony (i.e., the contrast between scientific experience and everyday experience), which was the main weakness of the classical economists. They failed not simply because of defects in their theoretical

system

but primarily because their theoretical solutions.

did not fit the existing historical variety of economic life. ‘‘We can appreciate the efforts of the classics to discover a rational natural order by studying the diversity of economic institutions but all the same, they did not satisfactorily explain economic life as it actually was.” They did not feel the divergence between theory and reality so strongly because they were chiefly concerned to look for the ‘‘natural”, rational and workable economic system. But Eucken wants it not to be tolerated. However, he recognises that the great and lasting service rendered by the classical political economy was “its discovery of the interdependence of the whole economic process and its development of the method of economic theory.” And this was ‘‘an essential step towards an understanding of economic reality.” Let us now dispose of another criticism. It is argued, on the one hand, by a good many writers that no serious attempt was made by the

classicists

like

Smith,

Ricardo

and

Say

to

make

clear

the

distinction between the science of political economy and the fact of social organization. Most classicals took the institutions of their time and place for granted and reasoned in terms of those institutions, e¢.g., private property, free competition, land system, inheritance, etc. They viewed economic laws as inexorable, not to be tampered with or thwarted. They could not understand that economic laws, which were generalisations about tendencies, could be curbed, countered or redirected. On the other hand, Robbins in his market-plus-framework interpretation of the classical theory of economic policy, firstly, calls attention to the importance of the institutional organisation of

society and economy as a mode additional to the market forces or private participation for the resolution of the basic economic problems;

secondly,

resolution

of the

establishes the createdness of order and of the problems of freedom and control, and continuity

and change, thereby directing attention toa

more

accurate

under-

standing of the complexities of establishing mutuality of interests and to the role of the system of social control; and, thirdly, suggests. the subtleties that are involved in reconciling freedom and order.

But Samuels is at pains to prove that the Robbinsian interpretation ‘‘considerably understates the scope, complexity, and sophistication of the classical theory of economic policy when examined in the context of the dual basic problems of freedom and control, continuity and change.”’ It ‘‘(a) neglects the non-legal forces of social control; (b) fails to specify what is involved in the

framework providing function of government, at the very minimum and regardless of whatever else may be said of the framework concept; and (c) inadequately characterises the classical view of the

role of law as an instrument or mode of change.”

14

Studies in Economic Analysis and Policy in Retrospect

Finally,

let us turn

to the Ricardian

assumption that man is

covetous. This was by far too simple an assumption. ‘‘Man from the economic point of view is unstable, allotropic: those faculties which subserve unbridled acquisitiveness, if indeed it ever exists, are differently developed in different men; acquisitiveness itself operates in more spheres than that of wealth only; the very success of acquisitiveness is apt to destroy for the majority the capacity and the opportunity of free competition.”

References Bau

Mes Economic

Theory

In Retrospect,

Cairnes, J.E., A History of Some

Cannan,

E.,

The

Theories

of

Leading

London, 1968 (2nd ed.), pp. 139,

Principles

Production

And

of

Political

Distribution

Economy.

(1776-1848),

London, 1917. Eucken, W., The Foundations of Economics (trans. by T.W. Hutchison), London,

1950, pp. 47-49. Gide,

C. and Rist,

C., A

Historyof

1948, pp. 104, 126, 239, 359-60.

Economic

Haney, pee pp. 909-1

Sake of Economic Thought, New

Heilbroner,

(ed.), Economic

R.L

Doctrines,

York,

London, 2nd

1953

ed.,

(3rd Printing),

Means And Social Ends (Essay by A. Lowe),

New Jersey, 1969, pp. 42-43.

Hicks, J.R., Capital And Growth, Oxford, 1965, p. 29. Hutchison, T.W., A Review of Economic Docirines, Oxford, 1953. Keynes, J.M., Essays In Biography, London, 1933, pp. 120, 135, 138. Malthus, T.R., Definitions In Political Economy, New York, 1963, reprint, p. 2. Marshall, A., Principles of Economics, 9th (Variorum) ed., Appendix B.

McCulloch, J.R., The Literature of Political Economy, New

York, 1964

12 Mill, J. Elements of Political Economy, New York, 1963, reprint, p. 4. Mill, J.S., Principles of Political Economy (ed. by W.J. Ashley), New

reprint,

York,

f 1961, reprint, p. xviii. Myint, H., Theories of Welfare Economics, London, 1948, Ch. 1. Newman, Ea The Development of Economic Thought, New York, 1952, pp. 91,

207-8, : Oser, J., The Evolution of Economic Thought, New York, 1970, pp. 41-44. Ricardo, D., The Principles of Political Economy And Taxation (Introd. by F.W. Kolthammer), London, 1949, pp. X-XIII.

——, The Principles of Political Economy

And Taxation,

(Introd.

by M.P.

Fogarthy), London, 1957, reprint, p. .vii

Robbins, L., Theory of Classical Economic Policy, London, 1953, pp. 20, 23, 62, ——,

172-173, 177-78, 181, 188. Robert Torrens And the Evolution

of

Classical

Economics,

london,

1958, Ch. 8.

—,

Theory

of Economic

Development in Economic Thought, London, 1968.

—, Evolution of Modern Economic Theory, 1970, p. 124. Robertson, D.H., Lectures on Economic Principles, Indian reprint, 1961. Robinson, J., Economic Philosophy, London, 1962, pp. 30-32. Roll, E., A History of Economic Thought, London, 1953 ed., pp. 140, 444, 461.

Economic Science: An Appraisal Say, J. B., A Treatise on Political Economy. ere ae The Classsical Theory of Economic

pp.

14-18.

15

Policy,

N2zw

York,

1966,

Schumpeter, J.A., Economic Doctrine And Method, London, 1954, pp. 39, 62.

Schumpeter,

J.A.,

History of Economic Analysis, London, 1967 (6th printing),

pp. 471. 510, 536.

Scott, W.A., The Development of Economics, New York, 1933, pp. 262-263. Senior N.W., An Outline of the Science of Political Economy.

Sidgwick, H., The Principles of Political Economy. Smith, A , The Wealth of Nations (ed. by, Cannan). Spann. O., Types of Economic Theory, London, 1930 (English ed.), pp. 100-101,

87-88,

110, 112, 114, 152.

Spengler, J.J., and Allen, W.R., Essays In Economic Thought: Aristotle To Marshall,, Chicago, 1960, pp. 193-194. Spiegel, H.W., The Growth of Economic Thought, New Jerszy, 1971, pp. 94, 381.

CHAPTER

TWO

Natural Sciences versus Sociat Sciences:

An Overview

of the Controversy

The purpose of this chapter is to present a critical overview of the controversy originating from the assertion that the social sciences cannot command that kind of status and prestige which the natural sciences do for their generalisations on account of the insurmountable difficulties, principally facing their methods of explanation and the subject-matter of their study. In its opening sections we strive to explain the nature and content of both types of science. From these we move on to specify the common ground and the gulf between them. Thereafter, we take a stock of the factors that account for the disability of the social sciences. This aspect is developed in the next two sections which occupy themselves with the disposal of arguments generally advanced, some familiar, others really serious. The chapter concludes with a brief

reference to economic science. J.

Nature And Content

of the Natural Sciences

In the natural sciences, as Popper says, we look for truth having a high degree of explanatory power, implying that it is. logically improbable’. In them all explanation is achieved ultimately by reference to causal or correlational antecedents. In them to explain an individual event is to explain the occurrence of some general or respectable characteristic in a particular case. A particular event, according to Hempel, is expiained by showing that its occurrence can be inferred by means of Jaws or theoretical principles from other, usually antecedent or simultaneous, particular

circumstances.”

The natural scientists alone observe the phenomena to be explained.? They conceive of the constructs by means of which theexplanation is given. With their techniques of model-building they are not dependent on the assumption that the

in perception

is identical

world

as

manifested

with or even very like the world as it is..

They resolve the problems arising from the distinction between both forms of the world by supposing that their explanatory models are representations of the real world, which is certainly not identical with the world as perceived. They acknowledge the role of the-

Natural Sciences Versus Social Sciences

scientist

in contributing

to the scientific

so doing they acknowledge the impossibility in science.

The concepts of the

natural

concepts, that is, numerical

sciences

determ’nations.

I

picture of reality and in of

are,

absolute objectivity

firstly,

quantitative

This is a fact of crucial

importance in permitting prediction on the basis of exact natural laws. Secondly, the physical concepts are abstract and marked by the absence of qualities from their enunciation. As the natural sciences advance, they tend to become more and more accurately quantitative.® One prevalent view is that typical physical laws are found by enumerating and summarizing observables. The other is that these laws are high-level hypotheses in a hypothetico-deductive system. But Hanson considers the first wholly false and the second erroneous to a degree.’

The term ‘natural science’ is often reserved for that scientific investigation which seeks to classify data and to reduce a wide range of observed phenomena to a brief statement of formula, called a law. But Redfield denies that that is a law at all because it compels nothing. ‘It is merely a shorthand description of phenomena observed to occur. It is tested pragmatically, not by any standard of absolute

troth,° II].

Nature and Content of the Social Sciences

On the other hand, the concern the interpretation of reality. A them consists in collecting facts to in building up more or less findings.®

of the social scientists is with great deal of the work done by answer particular questions and elaborate explanations of their

The business of discovery in the social sciences consists not only in the elucidation of the given premises, but also in the perception of the facts which form the basis of those premises. The process of discovering those elements in common experience which afford the foundation of our trains of deductive reasoning is social discovery just as much as the shaking-out of the new inferences from the old premises is. The perception of selection of the basis of social analysis is as much social science as the analysis itself. ‘‘Indeed it is this which gives analysis significance.’’!° Popper is of the opinion that the main task of the social

sciences

is ‘‘to trace the unintended social repercussions of intentional human

actions”!!, for there are certain uniformities of thinking and acting that can be detected in reasoning beings.” The social sciences are comparatively abstract and general and treat mankind from simple points of view and attempt to detect

general principles of action. But, to be sure, we cannot investigate the actions of an aggregate of men without first mastering all the more abstract sciences applying to them.’®

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Studies in Economic Analysis and Policy in Retrospect

However, the fundamental issue in the philosophy of the social sciences is the question whether man can be studied by the same methods as apply to lower beings or inanimate nature.’4 The objects with which the social sciences deal and the behaviour of which they endeavour to explain are actors on the social scene. Such actors have a comprehension of their own of the situation in which they find themselves and within which they carry on their activities. Asa result, both cognitive and purposive factors enter as determinants into all human behaviour.?® Besides, in the social sciences the establishment of correlational connections is not sufficient and has, therefore, to take recourse to functional analysis, which is a modification of the teleological

explanation and which seeks to understand a pattern or an institution by determining the role it plays in keeping the given system in proper working order or in maintaining it as a going concern.?® The social scientist seeks to understand human behaviour in precisely the same sense thatthe physicist seeks to understand the nuclear processes.’” Social science purports to be a deductive science after the model of the more complex physical science. It infers the law of each effect from the laws of causation on which that effect depends by taking into account all the causes which conjunctly influence that effect as well as by compounding their laws with one

another.*®

To sum up, the principal business of the social sciences is “‘to develop those abstractions which are most useful and which give us

the most significant information.” ‘It is a very fundamental principle indeed that knowledge is always gained by the orderly loss of information, that is, by condensing and abstracting and indexing the great buzzing confusion of information that comes from the world around us into a form which we can appreciate and comprehend.’’!® Ill. The Common

All the same,

Ground

the social

formulate hypotheses, deduce hypotheses, the consequences

arrive at (empirical) phenomena.

laws

scientists,

like the natural scientists,

testable consequences, eliminate of which do not withstand, and

about

the

inter-connections

of

Both groups of scientists ofter deductive causal explanations and

test them against predictions.

And explanation and prediction are,

in the ultimate analysis, one and the same operation directions. Popper dubs it the ‘unity of method’.*®

in opposite

The social sciences may proceed with the same method as the natural sciences in the expectation of discovering the same sort of explanation.*'

To quote J.S. Mill,

‘‘The science of human

nature

may be said to exist in proportion as the approximate truths, which compose a practical knowledge of mankind can be exhibited as

Natural Sciences versus Social Sciences

19

corollaries from the universal laws of human nature on which they rest, whereby the proper limits of those approximate truths would be shown, and we should be enabled to deduce others for any new state of circumstances in anticipation of specific experience.’’2? To remind ourselves of what Marshall noted, the claims of a social science to be a science are its power of appeal to definite external tests and its internal homogeneity.*® Marshall found both social science and natural science working their way towards ‘“‘a fundamental unity’’—physics in the forces that governed molecular movement, social sciences in the forces of human character. Both were busy studying the relations between the infinitesimal variations of different things.’’*4

All knowledge proceeds originally from experience. Observation and experiment are the two sources of experience. Experiment is observation plus alteration of conditions.2® The empirical sciences, natural or social, seek to describe and to explain or to understand the phenomenon in the world of our experience.”® The laws of the social sciences describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense they are on the same footing as other scientific laws, and as little capable of ‘‘suspension.’*?

Both natural science and social science lead us to the formulation of practical technological rules stating what we cannot do.*8 Both apply the hypothetico-deductive method by considering a law of mirco-behaviour when the initial state of the system is known. Both try to deduce from this the laws of motion of the system and jts future states.*® What is deduced is considered unknown or, more precisely, as that which is to become known. Marshall is candid when he calls social sciences ‘‘the reasoned history of men’ and physical sciences ‘‘the reasoned history of natural

phenomena.”’%? Lowe?! argues that the capacity to predict is not even a necessary attribute of the natural sciences (e.g., geology) and much less so of the social sciences in which historical explanation and structural analysis play a more prominent role. When all our physical sciences do not enable us to predict the weather two days hence with any great probability, it is inexpedient to expect the social sciences to predict the course of events in a nation, knowing its far more complex and varied character.” IV. The Gulf

Notwithstanding the common ground highlighted in the foregoing section, the fact remains that the laws of the social sciences A belong to a different species from those of the physical sciences. typical physical law is stated precisely and is quite free from ambiguity. By contrast, the usual social law 1s ordinarily couched in ‘Big Words’ and a great deal of ambiguity and is often presented with many qualifications and excesses.**

20

Studies in Economic Analysis and Policy in Retrospect

The social scientist’s knowledge of facts is different in important respects from the natural scientist’s knowledge thereof.** The natural sciences appeal to empirical data given through the senses, whereas the social sciences use empirical data given introspectively. In the natural sciences the data are ‘‘the deliverances of sense awareness.”’ In them the postulates of the deductive theory are not verified directly; instead they are experimentally confirmed indirectly through the theorems which are their logical consequences. There are at least three reasons for this: (1) The postulates designate an objective systematic structure with parts possessing most specific properties. (2) They possess a theoretical dynamics which permits them to predict rigorously intime. (3) They gain publicly valid theory by postulating more than the data of senses give. These considerations do not apply to the social sciences.*

The procedure of the social sciences, which deal with conduct that is purposive in some sense, can never be completely assimilated to the procedure of the physical sciences. It is not possible to understand the concepts of choice of relationship of means and ends, which are the central concepts of the social sciences, in terms of observation of external data. The conception of purposive conduct in this sense does not necessarily involve any ultimate indetermirateness. But it does involve ‘‘links in the chain of causal explanation which are, psychical, not physical, and which are, for that reason, not necessarily susceptible of observation by behaviouristic methods.”’¢

The methods of the sociai sciences are apparently different from those of the natural sciences.®” Jn the first instance, in the natural sciences observation proceeds from the causal (or incidental) to the systematic, whilst reasoning proceeds from the causal to the more

general

and

formal.

Jt starts from postulates, which are premises.

Prem‘ses are not conclusions or predictions. In the second instance, in the natural sciences observation feeds upon experimental work, whereas reasoning feeds upon theoretical work. But -in the social sciences there is not so much of this segregation or separation; in

them they are rather closely intertwined.%* In the natural sciences specialization is systematic

while

in the social

sciences

it is topical

because the interest of the natural scientist

specialization,

specialization. is concentrated

This is on

the

general laws, while that of the social scientist in the end is mainly in the particular, individual and unique evert. In a sense social theories are more remote from reality and require much more additional knowledge before they can be applied to particular instances. Another reason is that the way from the theoretical construction to the explanation of the particular is much longer in the social sciences than in the natural.*® At the end of the last century there was, acc>rding to Marshall, ‘‘a growing readiness among economists, as among students of

physical science, to recognise that the infinite variety and complexity

Natural Sciences versus Social Sciences

21

of nature’s forms is compatible with a marvellous latent simplicity of her governing principles.’’4° The physical or chemical world has a certain “invariant general form.” The uniformity of chemical reactions or the uniform movement of bodies or growth of plants makes it possible to formulate theoretical questions and generally valid physical, chemical or biological laws. No such uniformity exists in the social world, which exhibits an immense variety of forms and historical processes. A single order of nature exists and

has existed, while there is an unlimited variety of social orders or systems.*4

and

constantly

One author*® goes to the extent of pronouncing that sciences

investigate

behaviour,

whereas the

changing

the natural

social sciences investi-

gate action. Without waiting to amplify this, we can urge safely that the principle of indeterminancy applies to human behaviour. The inquirer has to confine himself to only one aspect at a time. “If he chooses to

observe one event, he must relinquish the possibi-

lity of observing another.” In the natural sciences the act-meanings play no part. In the social sciences the act-meanings of those whose behaviour is studied are shared by the inquirers themselves. The subject-matters of the natural sciences are unfamiliar, whereas those of the social sciences are familiar. The former require plenty of reasoning to link laws with observation, whereas the latter are capable of direct observation and their laws possess the quality of immediate obviousness, which is the very stuff of which everyday life is made.* The social sciences attain public validity by ignoring the specificity of the private valuations, which vary from person to person, and basing themselves on the generic property of the concrete, immediately inspected wants, apart from their content and concrete specific character. On the other hand, the natural sciences attain public validity by proceeding to specifically postulated objective valuations that are the same for everybody.* In the natural sciences ‘‘the simple low-powered theory’ is mastered to gain access to “‘the fancy high-powered theory,” from which have flowed many spectacular practical achievements. In the social sciences the fancy theory is mastered before anyone is trusted with the simple theory. The practical utility of the social sciences comes not primarily from their ‘‘high-powered frontier” but from their ‘‘fairly low-powered reasoning.’’ This is so because the needed data are either not available or are available inadequately for according precision to the high-powered theory. ‘‘Often the high-powered theory of today is the low-powered theory of tommorrow.’’%8

V.

Factors Disabling the Social Sciences

Let us now examine the factors which disable the social sciences in their attempt to explain, to expound and to predict. The social scientists are found to be more demanding of falsifying evidence

22

Studies in Economic Analysis and Policy in Retrospect

than are the natural scientists because there are fewer opportunities for conducting controlled experiments in the social sciences, with the result that contradictions are never absolute.4” The natural sciences can conduct controlled experiments, which the social sciences cannot. The natural scientist has a great advantage over the social scientist in the matter of verifying a given prediction owing to his controlled laboratory conditions and his ability to observe under ideal conditions.*® However, the great difficulty of testing the theories of the social sciences is not so much due to the impossibility of making controlled experiments and thus disproving theories once and for all, but rather due to the fact that lacking suitable laboratory conditions, the social scientists cannot agree on definite empirical criteria for falsifying a thesis. What is worse is the fact that they frequently disagree about the fundamental character of atheory. Positive social theories cannot be conclusively falsified by a single adverse result. An element of judgement inevitably creeps into their valuation. Normative social theories can never be evaluated by empirical tests. What adds further tothe confusion is the fact that there are several social theories, which appear to be neither positive nor normative but merely taxonomic, providing ‘‘an elaborate set of pigeon-holes’ into which social phenomena can be classified (e.g., the Walrasian system).*® Blaug®® holds that the status of the falsifiability criterion in the social sciences is about half-way between its status in psychoanalysis and its status in nuclear physics. The degree of confirmation offered by empirical evidence in the social sciences is itself a matter of judgement of the balance of probabilities between competing hypotheses. The natural sciences have another advantage over the social sciences inthe use of the quantitative method (i.e., method of measurement).°! In them the transition from the qualitative to the quantitative is easy and inevitable. In the social sciences it is in some connection almost impossible, and it is always beset with peril and difficulty.® In the natural sciences the parameters can, in principle, be reduced to a small number of natural constants but not in the social sciences in which the parameters are themselves in most cases. quickly changing variables.

The field of physics, for example, is the totality of phenomena where the number of significantly connected variables of different kinds is sufficiently small to enable us to study them as if they formed a closed system for which we can observe and control ali the determining factors. Consequently, physics has discovered simple relations between a few observables. No such simple regularities

can be expected in the social sciences.*4

Whena science isin a highly developed stage (for example, physics), its laws form a hierarchy in which many special laws appear as logical consequences of a small number of highly general

Natural Sciences versus Social Sciences

23

laws expressed ina very sophisticated manner. On the other hand, when a science isin anearly stage of development (for example, psychology), its laws may be merely the generalizations involved in classifying things into various classes.®> In the social sciences there is not one fundamental law of general application but a great number of them, all expressible in equations of similar form but with different constants, the determination of which is an enormous

task,

and which are different at different times, depending as they do on human consciousness.*6 The laws or generalizations concerning social phenomena are far more restricted in scope of application, are formulated far less precisely, and are acceptable as factually sound only if understood to be hedged in by a far greater number of tacit qualifications and exceptions than are most of the commonly cited laws of the natural sciences.°? The result of this has been that in no area of social enquiry a body of general laws has been established comparable with the outstanding theories in the natural sciences in scope of explanatory power or in capacity to yield precise and reliable predictions. Social inquiries are, in essence, descriptive studies of special social facts pertaining to certain historically situated human groups, and as such they supply no strictly universal laws about social phenomena. Many occurrences of interest to the social scientists require for their explanation reference to such factors as are *‘devoid of subjective meaning’ and thus to ‘‘non-understandable uniformities.’ °° Deduction of consequences is much more difficult in the social sciences because as yet that kind of mathematics, which is needed in the intermediate region of 5,000 to 50,000 objects, has not been developed. Neither elementary mathematics nor calculus is adequate. We have very quickly to run into mathematical problems that

exceed

our ability to solve them.*®

Such

being the case,

in the

social sciences the zero method (i.e., method of constructing a model on the assumption of complete rationality on the part of the individual concerned) can be used. The constructed model of behaviour can then be used as a kind of zero coordinate and the

individual’s actual behaviour can be compared with this model. VI.

Some Familiar

Arguments

Arguments justifying the disability of the social sciences can be classified under two broad heads—one, familiar and the other, really serious. We propose to discuss the first set of arguments in this section. Long ago Jevons*! pointed out that the reasoning beings are “subjects of enormous perplexity.’ The functions involved are so complicated in character that the scientific method cannot make rapid progress. Subsequently, Marshall asserted that the science of ‘man is complex and its‘laws are inexact.** Because of the complex, impure and unstable subject-matter, which the social sciences have to handle, wide generalizations of high probability can be relatively

few in them.®

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Studies in Economic Analysis and Policy in Retrospect

Gurwitsch®™ stresses the point that unlike most of the things and processes studied in the natural sciences, in the social sciences the behaviour of human beings, whether as individuals or as groups, cannot be explained or predicted as being simply the resultant of external forces on them. He further stresses the point that unlike the natural system the behaviour of the social system as well as that of the micro units involved in that system lacks a sufficient degree of orderliness or cohesiveness for reliable prediction. He shows how in the

natural

sciences

the

intra-and

extra-systematic forces that

determine the behaviour of a system can each be studied, at least in principle, in isolation from the influence of other forces.

Moreover,

since each force continues to produce its effect in accordance with the same laws whether it is acting alone or jointly with other forces, the total effect produced by a combination of forcesina given situation can be estimated by addition and subtraction. Furthermore, although the behaviour of a system will vary with different combinations of the intra-and extra-systematic forces, the forces themselves are not modified by one another. But this is not what we find in the case of the social sciences.

Kaplan® rejects the argument that there can be no laws in the social sciences because (a) each individual studied is unique, while laws treat precisely of what is common to many instances, (b) in human affairs the smallest causes may produce the greatest effects and the real application of the scientific method is therefore out of the question, (c) human beings are free to choose for themselves what they will do, and (d) human affairs are so completely determined at least in their general outlines as to confer inevitability on the future course of events. He dismisses the argument that the social scientists cannot experiment because their subject-matter does not lend itself to manipulation as superficial. Similarly, the argument that the social scientists cannot experiment because the problems are too complex or too variable is regarded by him as no more than ‘‘a blanket rationalization of our ignorance as to what experiments to perform and how to go about performing them.” It is contended against the social seiences that the events involving the activities of human beings, singly or collectively, bave a peculiar uniqueness and irrepeatability, which make them inaccessible to causal explanation. Causal explanation, which subsists on uniformities (and not peculiarities), presupposes repeatability of the phenomena under consideration. Human behaviour calls for reference to motivations (which are inaccessible to direct observation by an outsider), and hence for a teleological (referring to ends) rather than a causal (referring to causes) analysis. Under motivated behaviour the future appears to influence the present in a manner,

which is not come across

in the causal explanations of the

natural sciences. It is also suggested in this connection that the reactions of an individual in a given situation depend not cnly on that situation alone but also on his previous history. But Hempel considers these alleged handicaps of the social sciences inserious.®*®

Natural Sciences versus Social Sciences

25

Likewise, Kemney® refutes the argument that it is much harder to find laws inthe social sciences than in the physical sciences for reasons of principle and retorts that it should be easier instead to describe the actions of human beings because we have direct experience of what it is like to carry out human acts. He denies that free will has been infringed in reaching predictions in the social sciences. He maintains that it is feasible to find scientific laws, which will enable us to correlate human means to human ends.

VII. The Serious Arguments We now turn to the second set of arguments. At the end of the Second World War, Carrel® had felt compelled to remark that the sciences of inert matter had made immense progress, whilst those of living beings had remained in a rudimentary state. True, the social sciences have developed much more slowly than the natural sciences because their endeavour to make predictions quickly runs into mathematical problems too hard for them to resolve, partly, because they are not in a position to carry out carefully controlled experiments and partly, because the number of cases they can study at a time is of a much smaller order of magnitude than in the natural sciences. These apart, intermingling of facts and reasoning retards progress in the social sciences. These sciences can progress only through the interaction of observation and reasoning, that is, at the beginning of analysis facts have to be recognised by postulates and at its end conclusions have to be subjected to further scrutiny, and facts have not to be inducted

through a back-door at an advanced stage of the analysis.’° The really serious difficulties encountered as listed by Nage!,”! are as follows:

by the social sciences,

(1) The allegedly narrow range of possibilities for controlled experiments on the subject-matter of the social sciences: controlled empirical enquiry implies either controlled experimentation or controlled investigation. Much empirical research in the social sciences does not even attempt to be controlled enquiry and investigations of this type differ considerably among themselves in the comprehensiveness with which they satisfy the conditions for such enquiry.

(2) The historically conditioned or culturally determined character of the social phenomena: This has been explained above. (3) That human beings frequently modify their habitual modes of social behaviour as a consequence of acquiring fresh knowledge about the events in which they are participating or the society of which they are members.

(4) Objectively warranted explanations of the social phenomena are difficult, if not impossible, to achieve because those phenomena have an essentially subjective or value-impregnated dimension.

26

Studies in Economic Analysis and Policy in Retrospect

(5) Value-neutrality of the natural sciences is impossible to come by in social enquiries. The social values to which the sccial scientists are committed not only taint the contents of their findings but also control their essessment of the eviderce on which they base their conclusions. We must realise that in dealing with the social phenomena it is often impossible for the social scientists to define a hierarchical structure of variables, partly, because the social systems are often more complex than the physical systems and partly, because the laboratory experiments, which artificially create a hierarchical structure, are not available to them.”

To quote Mrs Robinson,” the great difficulty of applying the scientific method in the social sciences is that ‘‘we have not yet established an agreed standard for the disproof of a hypothesis. Without the possibility of controlled experiment, we have to rely on interpretation of evidence, and interpretation involves judgement.

We can never get a knock-down answer. But because the subject is necessarily soaked in moral feelings, judgement is coloured by prejudice.”” The social sicences lack ‘‘the intellectual discipline’ of the natural sciences. They run the risk of an ‘‘ideological predicament.’ 4 In the natural sciences almost complete unanimity is commonly

reached

on

matters of established facts, the reasonably

satisfactory explanations for the assumed

facts,

and

some

of the

valid procedures in sound enquiry. By difference, the social sciences often produce the impression that they are ‘‘a battle-ground for interminably warring schools of thought.” Their subject-matter

remains at ‘‘the unsettled periphery of research.””> The social scientists continue to be divided on central issues in the logic of social enquiry.

Despite the above-mentioned difficulties, many of the situations. in which the social scientists are interested can be represented by “approximately” hierarchical systems. In addition, the real

bearing

of generalisations in the social sciences is less doubtful than that of generalisations in the natural sciences because the ultimate constituents of the former are known to us by immediate acquaintance, whereas those of the latter are known to us only inferentially?’. The social scientists are in a position to advance explanation for a large variety of social phenomena, even if the comprehensiveness. of the proposed explanatory premises is generally small and their merit is ordinarily in dispute.”® Even then it seems clear that ‘“‘less harm is likely to be done by emphasizing the differences between the social and the natural sciences than by emphasising their

similarities.’’”

VIII. The Case of Economic Science It would not be out of place to mention here the position of

economic science, which is our discipline. The task of economic science is to observe and describe empirical social reality and to analyse and explain causal relations between

Natural Sciences versus Social Sciences

27

economic facts. It aims at acquiring ‘“‘a knowledge of the world in which we live, sufficiently adequate to enable us to forecast future events and thus to take precautions and fulfil our wishes rationally.’’8° Economic science is never ‘‘a mere system of formal inferences having no necessary relation to reality.’’®! Its propositions are “‘deductions from simple assumptions reflecting very elementary facts of general experience.’ They are indicative, not imperative; explanatory, not admonitory®.

The economic sciertists are concerned not with laws in the narrower, exact natural science sense but with adequate causal relationships expressed in rules ard with the affiliation of the ‘category of objective possibility.*% The

concepts

perfect to the

which

competition, status

imparted

are

of idealizations

a precise

used

in analytical

economics

(e.g.,

rational behaviour) approximate most closely

meaning

in the

natural

in the form

postulate specified mathematical economic variables*4.

sciences.

They

of hypotheses,

connections

between

However, idealizations in economic science differ from

are

which certain,

those

in

natural sciences in two significant respects: (1) In economic science they are intuitive, whereas in the natural sciences they are theoretical. The corresponding postulates. of economic science are not deduced as special cases from. a broader theory which covers also the non-rational and noneconomic factors affecting human conduct. (2) The class of concrete behavioural phenomena for which the idealized principles of economic science are meant to constitute approximately correct generalizations is not always clearly specified. Such principles as have not been given an empirical interpretation linking them, directly or indirectly, to observable phenomena lack in their explanatory and predictive use.®

Whilst the natural sciences test their deductive theories indirectly by empirically checking their theorems, economic science does this directly by empirically confirming its postulates. In the natural sciences one believes in the validity of their postulates because their deductive consequences, namely, their theorems, are experimentally confirmed. In economic science one beli¢ves in the validity of its theorems because they are the logical consequences of the immediately confirmed postulates.*® In spite of these, economic science has failed to attain

a_ theore-

tical dynamics. Northrop*’ advances two reasons for this failure:

(1) The first requirement of a theoretical dynamics is a theory providing concepts, which define the state ofa system at a given time, with respect not merely to its generic but also to its specific properties. The subjective relative character of valuations in economic science necessitates the grounding of the public validity of

28

Studies in Economic Analysis and Policy in Retrospect

the economic theories on their generic properties only, thereby leaving the state of a system at a given time imprecisely determined theoretically. Thus the first requirement is not satisfied. (2) Its second requirement is the presence of the relation of necessary connection joining the specific state of a system at one time to a unique specific state at any later time, that is, the principle of mechanical causation holds for the theory. In economic science the total quantity of valuations fails to obey a conservative law and this prevents the prediction of a future state, even if the present state is given specifically. This failure is due not to the scientific method ‘by which the theory is obtained but to the character of the subjectmatter to which its basic concepts refer. Thus the second requirement too is not satisfied. It cannot be gainsaid that the subject-matter of economic science is not objective in the sense either of the immediately inspected sense ‘data or the verified inferred common sense objects. Although the economic forces combine mechanically rather than chemically, yet ‘economic science has no near kinship with any natural science. It is at best a branch of biology broadly interpreted, as Marshall suggested .8° One reason why economic generalizations lack general acceptability is that observations which contradict the basic hypotheses of the prevailing economic theory are generally ignored. ‘‘The ‘theorist’

and the ‘empiricist’ operate in two isolated compartments and the challenge of anomalous observations is ignored by the theorist—as something that could be taken into account at the stage of ‘second approximation’ without affecting the basic hypotheses. And where empirical material is brought into conjunction with a theoretical ‘model, as in econometrics, the role of empirical estimation is to

illustrate or to ‘decorate’ the theory, not to provide basic hypotheses.’’®® Nevertheless,

as

Mill®

pleaded,

science

gets

support

to the

a better hold in

economic science than in other social sciences because it deals with motives that can be compared quantitatively and measured one against another. As Northrop puts it, economic science by restricting itself to the generic properties of the introspected valuations has accomplished something unique in the method of empirical science. It has attained deductively formulated theory which is empirically verified directly through its postulates without the need of appeal to their deductive consequences.*! Concludingly, more than any other social science, economic science has through the ages developed a formal and abstract and coherent corpus of a theory. The standards of both logical precision

and empirical evidence in it are steadily rising.®* Perhaps the major contribution of economic science to the total study of society is the concept of the generalized price-structure, i.e., the total structure of all terms of trade. Its another important contribution is in the sphere of decision theory, which is the study of how performance reacts to

perceived changes in the environment of the actor.®

Natural Sciences versus Social Sciences

29

References . K.R. Popper,

Conjectures And Refutations,

. C.G. Hempel, Aspects

of Scientific

London,

Explanation

Philosophy of Science, New York, 1965, Ch. 7. . A. Gurwitsch, ‘‘Social Science And Natural

Reflections on Lowe’s

1963, p. 229.

and Other

Essays

§Science:

On Economic Knowledge’

in the

Methodologicak

in R.L. Heilbroner (ed.),

Economic Means And Social Ends, New Jersey, 1963.

. R. Harre, The Philosophy of Science, London. 1972, Ch. 1 R. Carnap, The Unity of Science, London, 1934, pp. 56-57. W.S. Jevons, The Principle of Science, London, 1913, Ch. 13. N.R. Hanson, Patterns of Discovery, Cambridge, 1958, Ch. 4. . M.P. Redfield (ed.), Human Nature And the Study of Society, Vol. J,. Chicago, 1962, pp. 3-4. . L. Robbins, An Essav on the Nature & Significance of Economic Science, London, 1948 (reprint), pp. 104-106.

. ibid. . K.R. Popper, The Logic of Scientific Discovery, . W.S. Jevons, op. cit., Ch. 31.

London,

1957, p. 342.

. Ibid. . . . .

J.G. Kemeny, A Philosopher Looks At Science, New York, 1959, Ch. 15. A. Gurwitsch, op. cit. in R.L. Heilbroner (ed.), op. cit. C.G. Hempel, op. cit. A Kaplan, The Conduct of Inquiry, California, 1964, Pt. I.

. J.S. Mill,

‘‘On the Logic of the Social

Sciences’?

in P.P. Wiener

(ed.),.

Readings In Philosophy of Sciences, New York, 1953, . K.E. Boulding, Economics As A Science, New Delhi, 1970, p. 2.

. K.R. Popper, The Logic of Scientific Discovery. . B.F. Skinner, ‘‘Is a Science of Human Behaviour

Possible?’’ in D. Bray-

brooke (ed.), Philosophical Problems of Social Sciences, New York, 1965.

. J.S. Mill, op. cit. in P.P. Wiener (ed.), op. cit. . A. Marshall, Principles of Economics, BK 1, Ch. 2, Sec. 7. . A. Marshall, ‘‘The Old Generation of Economists And The

New’ in A.C. Pigou (ed.), Memorials of Alfred Marshall, New York, 1956, pp. 299-301, .

. W.S. Jevons, op. cit., Ch. 18 . C.G. Hempel, op. cit., Ch. 11.

. . . .

L. Robbins, op. cit., p. 121. K.R. Popper, Conjectures And Refutations, p. 343. A. Gurwitsch, op cit., in R.L. Heilbroner (ed.), op. cit. A. Marshall, op. cit. in A.C. Pigou (ed.), op. cit.

. A. Lowe, ‘‘Economic Means Heilbroner (ed.), op. cit.

And

Social

Ends:

A

Rejoinder’’,

in R.L..

. W.S. Jevons, op. cit., Ch. 31. . J.G. Kemeny. op. cit., Ch. 15. . L. Robbins. op. cit., pp. 104-106.

. F.S.C. Northrop, The Logic of the Sciences York, 1948, Ch. 13. . L. Robbins, op. cit., pp..89-90. . F.S.C. Northrop, op. cit.

and the Humanities,

New

. TC. Koopman Three Essays on The State of Economic Science, New York,,. 1957, pp. 130-132.

30 39.

Studies in Economic Analysis and Policy in Retrospect F.A.

Hayek,

1967, Ch. 8.

Studies

In Philosophy,

Politics

And

Economics,

40.

A. Marshall, op. cit., in A.C. Pigou (ed.), op. cit., p. 298.

41. 42. 43.

W. Eucken, The Foundations of Economics, London, 1950, Ch. 2. B.F. Skinner, op. cit., in D. Braybrooke (ed.), op. cit. A. Kaplan, op. cit., Pt.4,

London,

44. T.C. Koopman, op. cit. 45. F.S.C. Northrop, op. cit., Ch. 13. 46. R.M. Solow, Capital Theory And the Rate of Return, Amsterdam, 1963. 47. M. Blaug, Economic Theory I1 Rz2trospzct, Londoa, 1968 (2nd ed.), “‘Introduction.””

See

also

M.

Friedman,

Essays in Positive

Economics,

Chicago, 1953.

48. K.R. Popper, ‘‘Unity of Method in the Natural

and

Social

49.

D. Braybrooke (ed.), op. cit. M. Blaug, op. cit.

50. 51. 52. 53. 54.

ibid. K.R. Popper., op. cit., in D. Braybrooke (ed.), op. cit. L. Robbins, op. cit., p. 111. K.R. Popper, op. cit., in D. Braybrooxke (ed.), op. cit. F.A. Hayek, op. cit., Ch. 1-2.

55.

R.B. Braithwaite, Scientific Explanation, Cambridge,

Sciences’

in

1953, Ch. 1.

56. A.C, Pigou, The Economics of Welfare, London, 1946, Ch. 1. 57. E. Nagel, The Structure of Science, London, $8. C.G. Hempel, op. cit., Ch. 7. 59. J.G. Kemeny, op. cit., Ch. 15.

60.

K.R. Popper,

1961. Ch. 13.

op. cit., in D. Braybrooke (ed.), op. cit.

61. W.S. Jevons, op. cit., Ch. 31.

62. A. Marshall, Principles of Economics, BK 1, Ch. 3, Secs, 2-5. 63. J.E. Earley, ‘‘The Growth and Breadth of Theoretical Economics”? Christenson (ed.), Economic Theory in Review, Indiana, 1949. 64.

in C.L.

A. Gurwitsch, op, cit., in R.L. Heilbroner (ed.), op. cit.

65. A. Kaplan, op. cit., Part. III. 66. C.G. Hempel, op. cit., Ch. 10. 67. ibid., Ch. 15. 68. A. Carrel, Man, The Unknown, London, 1942, (11th impression). 69.

J.G. Kemney, op. cit., Ch. 15.

70. T.C. Koopman, op. cit. 71. E..Nagel, op. cit., Ch: 13.

72. A. Ando, F.M. Fisher & H.A.Simon,

Essays o1 the Structure

of Social

Science Model, M.1.T. Cambridge, 1963, p. 2. 73. J. Robinson, Economic Philosophy, London, 1962. TA. one ae & J Batwell, An Introduction to Modern Economics, New Delhi, 75. E. Nagel, op. cit., Ch. 13. TOnAmAndOnctyal, Opacity Da. 77. L. Robbins, op. cit,, pp. 104-106.

78. E. Nagel, op. cit., Ch. 14. 79. L. Robbins, op. cit., pp. 111-112. 80.

G. Myrdal, The Political Element in the Development London, 1953, Ch.

1.

81. L. Robbins, op. cit., pp. 104-105.

:

of Economic

Theory,

Natural Sciences versus Social Science

31

82. 83. 84. 85. 86. 87. $8. 89.

L.M. Fraser, Economic Thought And Language, London, 1937, p. 47. M. Weber. ‘‘Objectivity in Social Science’’ in P.P. Wiener (ed.) op. cit. C.G. Hempel, op. cit., Ch. 7. ibid.

90, Sule ‘92. ‘93.

J.S. Mill, Logic, BK 6, Ch. 9, Sec. 3.

F.S.C. Northrop,

op. cit., Ch. 13.

ibid.

;

A. Marshall, Principles of Economics, Appendix C. N. Kaldor, “‘The Irrelevance Journal December, 1972.

of Equilibrium

Economics’’,

Economic

F.S.C. Northrop, op. cit., Ch. 13. GJ. Stigler, Five Lectures on Economic Problem, London, 1949, p. 8.

K.E. Boulding, op. cit., pp. 21-22.

CHAPTER

THREE

The Practitioner Economist (Some Reflections on the Role of the Economist as an Adviser)* J.

Economics

as A Science

The purpose of science is to propound and to predict; it is to present a picture of how and why things happen and how they are interrelated and how they are to be controlled. Prediction is. sought because it permits control over given phenomena. It requires knowledge of general relationships. The qualities of certainty and generality are the hallemark or crux ofall true sciences. A true scientific law is one that admits of no exception—it cannot be broken but can only be wrongly formulated. It is true under certain conditions and hence is cast in the ‘“‘if...... then”? form of syllogistic logic. But science never attains certainty : it attains only very high probabitility. It attains this by essentially inductive: processes

of repeated

observation

and

experimentation, not by @

priori premises or artificially qualifying assumptions. A science may be positive or normative. A _ positive science, again, may be either pure or realistic. It studies ‘what is’. It is. tool-making.

A

pure

positive

of all reality content. implications

science

like mathematics is devoid

It is concerned with the shaking-out of the

of premises.

In it the

propositions

follow automati-

cally from the given axioms. A realistic positive Science like physics, chemistry or biology, deals with actualities. It discovers the accuracy of the given axioms and propositions by means of observation and experimentation. It deals with the world known in experience. In it facts

are

not simply brought together; they are compelled

by

thought to speak. On the other hand, normative science, as Roscher suggested, is concerned with ‘what ought to be’. It is tool-using. According to one

with

deductive

argument, economics

phases

principle is not always

of economic prominent

is concerned exclusively

enquiry

in which the reality

and, therefore,

premises can be

completely a@ priori without affecting the scientific validity of the theory. Thus economics becomes a completely hypothetical science, a pure science—pure in the sense of ‘being devoid of all reality content.’ To Alfred Marshall, purity was simply relative: ‘‘Some parts of economics

concerned

mainly

are relatively abstract

with

broad

general

or pure, because they are

propositions...it

must:

*In writing this chapter the author has freely used the vocabulary in the sources. listed at its end.

The Practitioner Economist

33

necessarily contain few details...it cannot adapt

itself to particular

cases...Other parts are relatively applied, because they deal with narrower questions in detail.’’ (Principles, p. 37f). Elsewhere, Marshall writes, ‘‘The function of a pure theory is to deduce definite conclusions from definite hypothetical premises. The premises should approximate as closely as possible to the facts with which the corresponding applied theory has to deal. But the term ae in the pure theory must be capabl: of exact interpretation and th

hypothesis on which it is based must be simple and easily handled. : (Pure Theory of Foreig1 Trade and Pure TTheory of Domestic Values, Dry: According to another argument, economic theory stops with the drawing out of chains of deductive inference from a few axio-

matic or universally agreed characteristics of economic behaviour and man’s environment. The resulting system of inferences is not completely lacking in empirical content but its applicability to a complicated system is slight. The essentially hypothetical character of the conclusions is indicated by drastic simplifications and by a copious use of ceteris paribus and other qualifying conditions. Two unfortunate qualities appear in a good deal of theoretical economics. There is, first, the exclusive concern of the economists with the implicatory phases of investigation to the neglect of the formulation of problems and the discovery of data, the implications of which are scientificaily fruitful. Secondly, there is their common claim that the necessary propositions constitute knowledge gained by looking hard at the facts. Tt is only natural that many theorists should move away from reality. in view of the belief that the objective quality and sufficiency of their premises is none of their business and that in any case they are doing first-class scientific work. Wide generalisations of high probability can be relatively few in economics as it has to handle a complex, impure and unstable subject-matter. But broad

propositions couid be made

in economics if the economists followed

systematically the method of abstraction by hypothesis. This runs the risk that they would be tempted to introduce more and more artificial hypotheses. Analysis may accordingly be confined to artificially simplified situations, and conclusions to tendencies of

questionable scientific value.

If, on the other hand, they moved on

to more complicated and realistic cases, their hard-won conclusions would lose their generality. It seems a reasonable hypothesis to say that it is the subconscious recognition of the lack of foundation for reasonable certainty in dealing with economic phenomena which !eads to such studies. Every economist realises that economics at bottom

is an inexact

and uncertain

discipline in which we cannot actually

control the unruly variables and cannot make confident predictions without qualifications. Hence, he subsconsciously feels his science to be inferior and himself to be an inferior sort of a scientist. Having reached this frustrating situation, the pure theorist finds consolation in the phantom certainties of formal logic or mathematics. Eventually, he may consciously believe that he has cured

the infirmities of his science and of his own.

34

Studies in Economic Analysis and Policy in Retrospect

As a result cf modern reaction, the mirage of certainty no lon;er lures many economists from the search for reality, and there is a widespread feeling that theoretical economics must be built on

an cdequate empirical base. This has led the economists to strive to bring thecry closely in touch with actual conditions and problems. A great deal of enlightened empirical research has been undertaken to check theories and to provide the basis for more adequate oncs. Modern economists beware of sacrificing realism and applicability to gain prescriptive generality. General theories, as Marshkaijl pointed out, may help one to cet into the saddle but they may prove to be encumbrances on a Jong journey. Pure economics is a kind of astronomy of the economic universe. It discusses the mutual determination of the positions and magnitudes of various economic quantities. Both pure economics and astronomy proceed by observation rather than by experiment. Both lean on the concept of genera! equilibrium through the solution of simultaneous equations. The success achieved by astronomy in prediction has been greater due to the greater stability and simplicity of the astronomical universe as compared to the economic world. To understand the economic world is an intellectual challenge. It is a world of complex interworkings. Man and his economic motives do not lend themselves to the triumphs of pure reasoning. Pure economics appeals to general uniformities rather than particular instances.

But

economics

propaganda

has developed,

for policies

of various

by and large, as a by-product of

kinds.

While wonder accounts

for the birth of physical sciences, it is social enthusiasm which accounts for the origin of social sciences. It is hard to maintain the distinction between the economist qua economist (of the definition) and the economist qua citizen (in the flesh). That would amount to schizophrenic economics. One business of the economist in the nineteenth century was to lay down the principles of economic policy, to say what policies were likelyto be conducive to social welfare and what policies were likely to lead to waste and

impoverishment. Till the end of the nineteenth century it was generally agreed that the business of the economist was not merely to explain and to analyse economic phenomena but also to suggest a code of policy. The economists of the eighteenth and nineteenth centuries were interested not only in value (which is a problem of economic magnitudes) but also in riches (which is a problem of economic Welfare). Thus welfare economics, i.e., economics of economic policy, has tried to set up standards of judgement on

economic optimum, to offer guidance to social policy, and to develop

propositions

which

are scientifically free from ethical judgements.

Welfare economics is like astrology. Both welfare economics and astrology study the effects of changes in given magnitudes (economic in one case,

astronomical in the other).

Both relate a welfare

function to human welfare. Both adjudge positions of given bodies (human beings in one case, heavenly bodies inthe other). But astrology has been more successful than welfare

economics because

The Practitioner Economist

35

of better personal and statistical evidence. Pure or price economics has to deal with two dimensions (viz, prices and quantities). Welfare cconomics has to deal with one more dimension (viz., maximisation of welfare). Finally, ethics has to deal withstill dimension (viz., maximisation of welfare in a given another sense). But the fact remains that full guidance for practice requires capacity to carry out quantitative, not merely qualitative, analysis and this capacity economic science lacks. The relations which have to be determined in economics are extremely numerous. The economist possessses only limited power of prediction of the direction of the change in economic variables but has no power of prediction of the quantity of this change and hence is obliged to give up his theological claim to certainty and to allow a wide margin of error in his predictory power. The subject-matter of economics is living and freeman. Direct experiment under conditions adequately controlled is hardly ever feasible. The econcmic constants, such as elasticities of demand and supply themselves are different at different times. depending as they do on human consciousness. The

foregoing

discussion,

therefore,

behoves

us

to attempt a

review of the three trends in economics, namely, the formalist trend,

_ the teleological trend, ard the Marxist trend. II.

The Three Trends in Retrospect

The formalist trend in economics has been identified as the preoccupation of the economists with economics as an analytical instrument for revealing interrelationships between economic facts existing under assumed conditions. The role of the economist has been regarded as similar to the role of an expert, who can say what is likely to fellow from certain given policies without judging as an economist

their

desirability

or

otherwise.

This is cold, excessive

neutrality. It betrays the exclusive concern of the economist with the implicatory phases of investigation to the neglect of the formulation of problems and the discovery of data, the implications of ‘which are scientifically fruitful. It has been influenced by the neoKantist philosophy developed by Rickert and Weber. It is a form of idealism. Reality isa construct of the mind; it is not another realism. The world is a creative act of thought. Idealism is Ppositivistic; it is positive realism. To.quote Weber, the function of a social science is to provide concepts which allow us to arrange empirical realism in a valid manner. As Senior put it, political ‘economy is as neutral between social schemes as chemistry stands neutral between the competing plans of sanitary improvement. The ‘conclusions cf an economist do not authorise him in adding a single syllable of advice. The economists must refrain from uttering even a single word of advice and keep clear of morals, and political

science. The Laussane school (cf. Pareto) was disarmingly frank about the immature state of economic science. In recent times Robbins gave the first emphatic

expression

to this view.

There

is

36

Studies in Economic Analysis and Policy in Retrospect

nothing in economics to suggest whether

this or that piece cf state

intervention is desirable. Economics of welfare, i.e., economics of economic policy is too unscientific in character to bea part of economic science. The economist cannot even say that the selfregulating system he is studying is superior to another. ‘‘Equili-

brium is just equilibrium.” His task consists in understandinga certain aspect of reality, viz., the implications of scarcity. The question of economic policy involves so many non-economic elements that it should not be dealt with on the basis of purely economic considerations. It is feared that the economist’s conclusions would otherwise come to depend on the scale of sociai values held by him. Such conclusions may not be accepted by others not believing in those values. His judgements are likely to be misunderstood. Robbins reiterated his old view in his paper published in Economica of February 1953 where he observes, ‘‘By itself the knowledge economics provides may furnish no means of choosing between social objectives. But if it can provide knowledge which is relevant to this choice, that is enough.”

The teleological trend started as a reaction against the formalist trend. It has been noticeable chiefly in academic circles. It has served to combine rigorous analysis with the teleological assumptions. It has been concerned with particular ends or purposes, such as avoidance of fluctuations, full employment, and greater economic equality in weaith distribution. It has worked out the implications of the teleological assumptions. It claims to have mace available a much surer guide to policy without impairing the

positivist nature of economic generalisations.

It has diagnosed the

economic ills and suggested their remedies. Even when has revealed a tendency to be of use in world affairs.

eclectic, having

abstract, it It has been

blended theoretical analysis with practical bias.

It

has made a strong plea in favour of greater realism in economics and has attacked abstract speculation. Whereas its Marshallian branch, consisting of such economists as Durbin, Fraser, Beveridge, Hicks, and so on, has believed in economic laws based on facts and observations, which are descriptive as well as normative and at the same time tend to be universal, its philosophical branch, consisting of such economists as Souter, Macfie, Pearson, and so on, has held economic values to be part of the ultimate values of the sood and the beautiful. Its both branches, however, have cherished some reform ideas and have considered that the normative implications

of economics are inescapable and have to be faced squarely. The Marxist trend has produced an analysis of the contemporaneous social cosmology from the standpoint of property relations (analogous to physiology) and from analysis it has deduced certain general principles of the development of society, e.g., class conflicts and inner contradictions (analogous to anatomy) and commented

on the

abnormal features, as revealed

in crises, of the

capitalist system of production (analogous to pathology). Finally, it

The Practitioner Economist

37

has emphasised the class nature of society (as social datum) as against the natural datum of choice stressed in the formalist trend and prescribed a revolution (analogous to therapeutics). Ill. Growing Importance of Economic Advice For good reasons or bad, there has arisen a strong demand for trained economists and the services they can render; and this demand has manifested itself not only in an increasing call for the occasional services of the economists in the universities or institutes (for example, in the Planning Commission’s or Prime M inister’s panel of economists or for advisory or ad hoc committees) but also

in the establishment of posts and o‘fices in private business, in journal’sm, in central and local governments, where people having university training in economics, use their knowledge with great advantage. The institution of the Economic Adviser or the Economic Practitioner is an established fact. We have today a situation where the functions of the state are extensve and cyntinually changing. The businessman finds his activities limited and conditioned by rules and regulations, the rationale of which he does not necessarily understand and the repercussions of which he cannot easily foresee. The administrative civil servants and the politicians find themselves confronted by tasks where rules of thumb and intuition are helpless, or at least liable

to

extensive and conspicuous error. Thus, it is more by the force of these circumstances than by that of the sheer merit of their science that the economists find today a persisténtly strong demand for their services as consultants. This situation has brought the economists and the public closer together. The economists are becoming more aware of their duties towards the society and the society is paying increasing attention to what the economists have to say on matters of economic policy. As a result, economic theory is becoming more operational in character

and the ez»no nists are progressively becoming technicians. When under planning we are dealing with the growth of output in physical terms, We need information which is both technical

and

economic,

though more technical thaneconomic. Anunderdeveloped economy needs to know how much steel a given plant will produce. how long it will take to acquire the know-how and how efficiently it will operate. It needs to know what type of land it has got, what sort of arts of cultivation could be applied to it, what social problems and technical functions are involved in effecting a change in the given arts. And so on. [t is a very long and laborious process to make a plan and to put it into execution. At every stage some things are found to be behaving differently from what was expected, and consequenly, certain readjustments become necessary. One of the chief preoccupations of the economists lies in presenting a coherent and informed view of the general economic development. The economist is a great asset as an elucidator. He forecasts the unrolling of events not only when certain strategic variables. are

38

Studies in Economic Analysis and Policy in Retrospect

left to work themselves out unhindered but also when the strategic variables are altered, and suggests how they could be altered. Professional views of the economists are gradually gaining in status also in large private undertakings and in financial concerns. The immensely increased activities and responsibilities of governments and the development of specialised international organisations dealing with economic problems have enhanced the importance of the advice by economists in an impressive way. The economic activities of a modern governmet are quite large in relation to the total economic activity of a country. The expansion of the share of the national income taken by the government is associated with a comparable expansion in its economic functions. While in several other economic activities a common sense approach can suffice, in really large undertakings, such as those controlled by the modern governments, in the fields of national aggregates comprising budgetmaking, balance of payments, incidence and effects of taxation, effects of wage changes, central banking, external economic policy, tariffs, monopoly practices, etc., it will be essential for a government for the following reasons to have the advice and assistance of people with special economic training and experience in assessing those questions in these fields which involve its responsibilities: (1) These fields comprise general, as distinct from specific, measures, and involve to a significant extent the totality of economic forces and cannot, therefore, be judged by any simple or common sense rules. (2) The calculations involved in them are undoubtedly of bewildering complexity to necessitate the specialised skill of a professional

economist-statistician. It will be formidably difficult for the layman to find his way through the problems underlying the change in any part of the system without professional guidance. (3) The analysis is certain to be quicker and more comprehensive when it is done by someone who has been trained to do it. The special province of the economist

is the economic system as

a

whole,

and

the

relations

between the workings of its different parts. The basic function of that group of economists whom we address as official or government economists is the systematic presentation of policy alternatives, the analysis of the consequences of particular decisions, sets of decisions, or failures to decide, and the imposition of the inescapable logic of the national income identities. Two technical tasks have thus to be distinguished—the forecasting of variables beyond the government control and the quantitative analysis of the mutliplier and interdependent consequences of the policies under consideration. Whereas the first task may be given up as hopeless and the official economists may decide to wait and see and then act, the second task still remains. The major part of the work of the official economists, in practice, consists in the preparation of annual economic surveys or national budgets.

IV. Role of Economic Theory in Economic Policy It would be useful to recall in this context, as stated earlier, that

The Practitioner Economist

economics began as an attempt to classify and to resolve of political dispute. So it has been said that its proper metapolitical. Even the most theoretical economists have to tender advice on the basis of pure theory of casual

39

the issues function is been prone sequences

and a certain knowledge about the world derived from a simultaneous conspectus of the field as a whole.

The economic adviser has to bea good economic theorist. He has to possess the necessary technical equipment to know the possible interrelations of economic forces. He has to know how and in what various directions a given policy will produce its effects in order to take.a decision on it, and in this he is aided by economic theory, which supplies him with tools of analysis and which teaches him how to use logic within the framework of known economic data and how to arrange facts in their proper order, either in the order of their magnitude or in the order of their place in time. Economic theory provides him with an insight into the variables on which a particular determinant operates so that when an action is contemplated in the economic field, he is able forthwith

to

see

the

way in which it is likely to work itself out and the range of phenomena which it is likely to affect. But economic theory ts not self-sufficient. It has got to be supplemented by judgement and intuition. In matters of policy it seldom happens that the argument is wholly on one side. The empirical facts that are available in our society are very often imprecise. Quantitative comparisons of alternative situations are not always practicabl>. Hence considerable realiance is placed on judgement and intuition for isolating th> more significant aspects of a problem. An amalgam of logic and intuition is necessary for economic interpretation in its highest form as Keynes advised, or, as Marshall stated, no practical issue can b2 settled purely on the basis of economic theory and ultimately we must consult our ethical instincts and common sense to decide how far we would be scientists and how far we would be reformers.

The issues in which most theorists are interested require the specification of the direction of the net outcome of the influences operating country-wise—the influence of one variable on another. The contrary specification of this direction requires a specification of the magnitudes and the signs of the influences. For such issues all that economic theory can do is to specify some measurable quantity on which the outcome will depend. To determine the outcome in any particular case, however, it is necessary to measure the quantity. Such measurement need not involve a statistical process but it always requires a detailed specification cf the environment to which ecr»nomic t*eory is to be applied and which economic theory cannct furnish itself, From this it follows that the role of economic theory in the solution of practical problems is extremely limited. Apart from this, beyond a certain point, economic theory may well become a handicap rather than a help. The economist with a view to getting

40

Studies in Economic Analysis and Policy in Retrospect

clear-cut answers may be tempted to simplify his analysis to an extent where his results cannot be applied at all conveniently to practical problems. The right way, therefore, is to apply economic theory to problems of economic policy within the context ofa particular problem occurring ina particular environment. This is known as the ad hoc or taxononic approach, which i3 one cf the three main approaches to the relation between economic theory and economic policy, the other two being the prescr ptive approach and the econometric approach. According to the ad hoe or taxonomic approach, the only proper function of economic theory in matters of policy is to act as an aid in reaching solutions to specific probtems. Critics point to a basic dichotomy between economic theory and policy advice. The former is of general validity since it embodies rigorous formal deductions from premises founded on common experience which is clearly discernible,

while

the

latter

amounts

to the demonstration

of the

implications of certain value judgements, i.e., criteria of what is desirable or undesirable in economic affairs, taken over from other sciences, such as philosophy or given by some political authority. Empirical studies bring econemic theory much nearer to the scientific problem in hand; they hclp the economist to decide upon the applicability of particular theoretical propositions and tke selection of additional essumptions. Moreover, by providing the factual content, they may enable him, in certain cases, to make a correct prediction as to the direction of economic change. These considerations are, Fowever, relevant eccording to this approach, only to a particular moment and to a particular situation. The continuous changes in basic data and difficulty of meesuring economic quantities very materially limit the power of the economists to

predict, and economic theory, even when enlivened by empirical studies, cannot give the public more than a limited guidance to policy. Economic theory can specify certain critical values of economic variables or constants on which the solution of a problem might depend. The only proper function of econgmic theory in matters of policy is to act as an aid but never as a unique basis in

finding solutions to specific problems. According

to the

prescriptive

approach,

starting

from general

premises based on a widely acceptable value judgement, a theory of economic policy can be formulated which wi!l consist not only of a method of approach or an apparatus cf analysis of economic problems but also of a system of explicit er implicit prescriptions intended to guide policy decisions in s:verai situations. In Pigou’s hands economics becomes an objective besis of an art. The norm of his welfare economics is the desirability of maximising national dividend by means of the equi-marginal principle as applied to social net products. Meade wants economic analysis to be used as a direct guide in the formulation of economic policy. Lerner develops a whole system of rule for a controlled economy designed to bring about conditions that would approach a competitive equilibrium

The Practitioner Economist

with

an

equalitarian

41

distribution of income. In appraising institu-

‘tions and practices and making recommendations, the economist has

the economic criterion in his mind. This criterion represents his standard of good and bad and is used to give the advice simpliciter without which he is entirely stultified. By resorting to his analytical map he is able to say outright and with substantial authority what will happen to the community as a result of a given policy.

The economist must make a choice. If he wants to maintain strict objectivity, he becomes a technician. If he wants to advise on policy, he must, in most cases, relinquish his claim to the objectivity

of a natural scientist. The economist is a social scientist and he is best qualified among social scientists to make judgements and recommendations on the distribution of well-being in a community. But while taking upon himself this task, he should make it absolutely clear and explicit on what basis he has arrived at them. If his recommendations

are to command

assent, his judgement on a given

norm must conform to the judgement of the public. He may not be able to go against public opinion but he must lead rather than interpret it. But for this he must assume full responsibility because he makes in his argument the implicit value judgement that the majority opinion fully represents and should determine the community’s preferences, because the community’s preferences may be inconsistent and contradictory and in suc’ cases they can certainly not serve as a guide for the economist to follow, and because there may exist wide areas of choice where the majority of people are unable to make a judgement insofar as they are ill-equipped

for it. According to the econometric approach, the theory of economic policy amounts in fact to an analysis of the techique by which economic theory can be brought to bear on policy decisions. It amounts to an investigation of the method of instructing and applying econometric mode!s in order to provide guidance for policy decisions. In Tinbe gen’s opinion, economics does not contain any prescriptions for action. The application of statistics to economic problems is called for to fortify economic deductions or hypotheses and to make specific laws. A few basic empirical statistical laws may yield an elaborate structure of deductive theory and spell out mutual implications and help the economist in testing every proposition by concrete evidence for want of which his propositions may be of mere definitional or conceptual value.

V. Modern Economic Thought And Economic Policy Three channels of economic thought are directly concerned with | economic policy. First, we have modern welfare economics. The concept of welfare economics formulated in recent times ts that of a theory of economic policy free from subjective value judgements, that of a part of the general body of economic theory concerned primarily with policy, or that of a science which finds out what is the best thing to do ia various situations. The great promise of

42

Studies in Economic Analysis and Policy in Retrospect

mcdern welfare economics was to provide criteria of general or even uni\ersal validity on the ground of which one could decide whether a course of action was desirable or undesirable from the economist’s point of view.

Next, we have econometric research. It is closely connected the applicetion of econcmic theory to policy.

with

Its special importance

in this respect emerges from a combination of deductive theory and empirical research. The different tools of econometrics, e.g., input-

output analysis and linear programming, have provided a considerable amount of useful information about certain structural relations of economic system es well as actual solutions of some specific policy problems, Jargely of a technical character. While these tools have not as yet proved sufficiently reliable to provide major guidance for policy-making, and while certain inherent limitations on their capacity to accurately estimate the consequences of alternative courses of policy must be admitted, further development of economic methods is suffused with a very great promise. To illustrate, the methods of work of the official economists 1n Great Britain and the Netherlands consist of amixture of qualitative and quantitative analysis involving only the elementary statistical methods. Exceptionally simple econometric methods are employed in basic research (e.g., values of parameters) and as an aid to the analysis of current problems of policy (e.g., guesses of the future movements of excgenous \c1iables). In Great Britain the final result is computed as the sum-total of a set of imprecisely stated special factors behind which the general assumptions, if any, lie obscured. This is tre arithmetical method, the merits of which are greater flexibility, greater adapatability and greater scope for the insertion of non-linearities and discontinuities. In the Netherlands the

estimates

are framed

on

the basis of general

factors in the first

place, and special factors are considered in the second. This is the alrebraical method, which is claimed to be more system?tic and

intellectually tidier. There is under it a Jesser danger that the important but round-about or otherwise unobvious consequences of policy decisions or sets of decisiors will be ignored. It is less. cumbersome and more streamlined and, therefore, much quicker to manipulate; it is

well adapted to the presenting

of policy

problems

in the form ofa series of alternative possibilities. But there is under it the danger that fascination for mathematical manipulations may render the user forcetful of reality.

Finally, we have the recent attempts and formulating principles of economic growth. The gradual shift of interest in the sphere of policy in the post-war years from cyclical fluctuations to structural maladjustments italicises the importance of studies of long-term processes. Research has been proceeding in two separate channels. In one, efforts are made to discover ceriain uniformities characterising various aspects of economic growth by means of strictly empirical statistical studics. In the other, there is extension of economic theory to dynamic problems.

The Practitioner Econoinist

43

VI. Case for Expert Economic Advice Problems problem,

of economic

three

policy

contain,

like

every

practical

constituent elements, namely, the aim, the situation.

and the action. The central core of these problems lies in the contradiction between the aim of economic policy and the existing economic situation. From this contradiction stems the question as to: the means whereby the aim and the situation could be brought into: compliance. The starting point may be any ofthese three elements. In the case of the first element, the government or public opinion brings. itself to accept a new aim of economic policy, proceeding from which the economist enquires into the obtaining situation and then. asks the question as to what action is to be taken. In the case of the: second one, he jis called upon to confront it (i.e., the situation) with his ideas on the proper order of things, which is nothing else than the very aim of economic policy, and thereafter to examine what can

be

done

to

improve conditions. In the third one, for instance,

we have a plan for industrialisation of an under-developed country, Setting out from which the economist finds out the effects which it has on the civen situation and evaluates them in the light of their harmony or disharmony with the aims of economic policy. Problems of economic pclicy on which professional economic advice ‘has often been ignored with most vividly apparent consequences may be divided into two broad categories, notwithstanding. the fact that such a division will not perhaps be a very precise one. In one category we have the general problems of contrcliing the economy as a whole and achieving certain general objectives (mostly of teleological nature), such as full employment, stable prices, a high rate of growth, and a satisfactory balance cf payments. These problems lend themselves to an aggregative analysis on the Keynesian lines. In the other category we have the specific problems. with which the officials have to deal and on which they are often

instructed

to make recommendations, such as the policy in relation

to development areas and local unemployment, the reorganisation of particular industries, the pouicies to be pursued by nationalised industries, more particularly in connection with pricing and investment, town planning and land utilisation, agricultural policy, taxation reform, and so on. These are extremely diverse problems, differing very greatly in their degree of permanence and importance. The initial and primary responsibility for tackling them rests with individual departments. The sums of money which these problems may involve may ofien be considerable, and the economic analysis and calculation posed by them may well be difficult and intricate.

It is contended that the importance of professional or expert economic advice is limited in the case of these two categories of problems. For one-thing, it is stated that few, if any, problems of economic policy can be decided on the basis of the advice which a professional economist may be best qualified to offer. Almost always other arguments and considerations, e.g., political commitments, defence requirements, social policies,

administrative

considerations,

44

Studies in Economic Analysis and Policy in Retrospect

etc., will be important, if not decisive, and must be given due Weight in drawing upa set of conclusions and recommendations and which officials, who are not economists will cften, if not invari-

ably, be better qualified to assess. But although economic considerations are not the sole basis for recofnmendations and decisions of policy, yet it can hardly be denied that they are an indispensable part of it.

For another, it is said, granting that these issues do need economic advice, we may be disposed to enquire the reason as to why that should be taken from the professional economists alone. Thus it is argued that a prior formal training in economics is not an essential qualification for giving competent economic advice. The ability to think in economic terms can be acquired by an intelligent person who possesses the right interests and temperamental qualities. To this it may be replied that the absence of a prior formal economic training will always remain a handicap, consequent upon which most people will often acquire a set of theories and beliefs about economic problems and relationships, which is either inadequate or oversimplified. It is further argued that many administrative civil servants, though not professional economists, have already received some prior formal economic

training. But to this it may be replied that this does not by itself constitute a safeguard due to the following reasons: Firstly, not everyone who has got a degree in economics has a real talent for it and possesses the quantities of judgement and a sense of what is practicable. Secondly, there is /ittle ground for expecting that the possession of an economics d:>gree will enable a person to be employed on a job where he can use and promote his specialised knowledge. Lastly, trainining is only the first stage. It is equally

necessary to gain experience in applied economic work and in the handling of data. The administrative civil servant lacks the opportunity for the c»ntinuous exercise of economic

reasoning, i.e., he

is

much too busy with other work, bulk of which requires an altogether different approach and attitude of mind. However, there remains the fact that the full considzration of any issu2 of economic policy presumes a mastery of the rel2vant facts, and almost always an Official in the department directly concerned with the matter will be conversant with those facts from the very outset. To the extent that this is s9, he will be a more competent

authority on

the

subject and a better judge of the merits of an argument or policy than a professi»nal economist who has not previously worked on the problem, But economic training may often help one to direct one’s attention to the relevant facts which may otherwise remain unobserved. It will teach him to consider always the inter-relations of the particular components without losing sight of the general. One of the chief benefits of economic training is a clearer awareness of the limitations both of one’s own knowledge and of the subject itself. The value of such training as an aid to clarity, to the perception and formulation of cogent arguments and factors, to the

The Practitioner Economist

45

readiness and ability to work in quantitative terms and to the recognition and evaluation of alternative courses of action is enormous.

Howsoever

important

non-economic

factors

may be,

it is indisputable that the problems enumerated above have economic aspects and their appraisal cails for a certain specialised ability and experience which not every official possesses or would claim to possess. As Sidgwick put it, itis very rarely, economic

questions,

which

if ever,

that

the

practical

are presented to the statesman, can be

unhesitatingly decided only by abstract reasoning from elementary principles. For the right sclution of them full and exact knowledge of the facts of a particular case is commonly required; and the

difficulty of asceitaining these facts is such as to prevent the attainment of positive conclusions by any strictly scientific procedure. At the same time, the function of economic theory in relation to such problems is, nonetheless, important and indispensable, since the practical conclusions of the most untheoretical expert are always reached implicitly or explicitly by some kind of reasoning from some economic principles and, if the principles of reasoning be unsound, the conclusions can only be right by accident. Or, as H. Myint writes, we have to face the fact that economic propositions, however carefully they may have been distilled according to the canons of logicai purity, will have to be transferred into economic policy and in the practical execution of policy scmcbody must face the final necessity of making ethical judgements. We might palm that responsivility on to the hypothetical economic planner or the ‘statesman’. But so long as economic policy cannot be made ‘fool-

proof’ like a motor-car, which can be run without any profound knowledge of motor-mechanics, that ‘statesman’ must, to some degree, be either an economist or advised by economists, This should not blind us to the limitations of the profession. Economic prognostication is difficult. The changes in data are not accurately predictable. Thé multi form reality cannot be reproduced in toto in the model used to elucidate the concrete case, for the model normally is very ill-clad with relationships and is very simple. The values of practically all economic variables are strongly influenced by business fluctuations. So perhaps the best course left to the economist is to be short on forecasting but long on assuming. Secondly, policy-makers are often embarrassed by the multiplicity and divergence of advice that they are at times given by the economist. They seem to be divided on some quite fundamental aspects of a given policy but the large measure of their disagreement arises from their liability either to obtain any facts with which

to test their theories or to put their results in a form in which they can be tested empirically. They arise also from the lack of resources to carry out the test. Thirdly, there lurks the danger that economists

will go beyond the limits both of their knowledge and their province and claim rather too much. Economic science is nearer to medical science than to physical science. Not all doctors give good advice.

46

Studies in Economic Analysis and Policy in Retrospect

They themselves admit that they have still much to learn. And this very neetly sums up the limits of the role of the economist as an adviser. Fiduciary value judgements aie not still wholly extinct.

References 1. 2.

K.E.

Boulding,

Eco omics,

Vol. lf,

A.K.

Gupta,

Das

Number,

3. 4,

‘Welfare

Economics’

ed.by

K.E. Boulding.

‘‘The

Economic

10. di.

Special

R.F.

Oxford Economic

June, 1955.

Harrod,

December,

9,

Weekly,

1959,

, “The Place of the Economist in the Government’, Papers,

8.

Economic

of Contemporary

July, 1961.

Economic Journal, December,

67]

Adviser’*,

A Survey

J.S. Earley, ‘‘Limitatiors of Economic Theory’ in Economic Theory in Review, edited by G.S. Earley. R.L. Hall, ‘Reflections on the Practical Application of Economics’,

5 6.

in

‘‘Scope and

Method

of Economics’,

Economic

Journal,

1938.

P.D. Henderson, ‘‘The Use of the Evonomists in British Administration’, Oxford Economic Papers, Fabruary, 1961. J.R. Hicks, ‘‘The Foundations of Welfare Economics’, Economic Journal, December, 1939. H.G. Johnson, ‘‘The Taxonomic Approach to Economic Policy’, Economic Journal, December, 1951. ;

W.A.Johr and H.W. Singer, The Role of Economist as Official Adviser. R.L. Marris, ‘‘The Position of Economics and Economists in the Government Machine’, Economic Journal, December, 1954.

12.

A. Marshall,

13. 14. 15. 16. 17. 18.

——, Principles of Economics. H. Myint, Theories of Welfare Economics. A.C. Pigou, Economic Essays And Addresses. ——, Economics of Welfare. A.C. Pigou (ed), Memorials of Alfred Marshall. A. Radomysler ‘Welfare Economics and Economic August, 1946.

19, 20. 21.

L. Robbins, The Economist in the Twentieth Century. EE. Roll, History of Economic Thought. T.Scitovsky, ‘‘A Note on Welfare Propositions in Economics’, Review of Economic Studies, Novemter, 1941. P. Streeten, ‘‘Economics And Value Judgments’’, Quarterly Journal of Economics, November, 1950.

22.

Pure

Theory (Foreign Trade—Domestic

Values).

Policy’,

Economica,

23.

J. Tinbergen,

24.

R.C. Tress. ‘‘The Contribution of Economic Theory to Economic Prognostication’, Economica, August, 1959. H. Tyszynski, ‘‘Economic Theory as a Guide to Policy: Some Suggestions

25.

‘‘Productivity And Welfare’, Economic Journal, March, 1952.

for Re-Appraisal”, Economic Journal, June, 1955.

CHAPTER

FOUR

Economie Science a3 it is: A Synoptic View" Philosophy seeks eterna! truths a priori (purposely).

It encoura-

ges us to sortout the moral questions from the empirical.

Ethics

evaluates and prescribes. Art is a collection of precepts. It is practice. its language is in the imperative mood. Science is knowledge. It is a system of truths. It is a body of theorems which are based on assumptions derived empirically and which embody hypo-

theses capable of verification

with regard to those

well as the predictions, as Kaldor puts

it.

assumptions

It consists

as

of structures

of concepts. Its language is in the indicative mood. Facts are the relata of science. The task of science is to analyse and to explain the causal relations between facts or events. Generality is the hallmark of a true science. There is no science without generalisations. Science seeks to classify the nature and the causes of phenomena. It observes and describes empirical reality.

Its aim is to

find in the

sensations produced by concrete reality the revelation of an abstract

system.

But science is explanatory rather than descriptive. Abstrac-

tion is the basis of science. A perfect science is deductive. Its object is to produce accurate and interesting predictions. It seeks to forecast future events. It attains at best very high probability because it cannot attain certainty. Pure science is devoid of all reality content. It is concerned with the shaking-out of the implications of premises. Its goal is to develop a theory ora hypothesis that yields valid and meaningful predictions about phenomena (not yet observed). Its function is to deduce definite conclusions from definite premises. It sacrifices realism and applicability to gain prescriptive generalisations. On the other hand, in realistic science, facts are not simply brought together but are instead compelled by thought to speak.

After Northrop, we can distinguish between natural science and social science in the following manner: Natural science appeals to empirical data given through the senses. Social science, by comparison, uses empirical data given introspectively. Sincéit appeals to introspection, it cannot get any *This chapter reiterates the salient points made

in the previous chapters by

drawing extensively on the statements of experts listed towards its end.

48

Studies in Economic Analysis and Policy in Retrospect

criterion for public validity. It runs the risk of an ideological predicanent. It may become value-laden or value-loaded. But a social science and a natural science are smilar in certain respects: Both formulaite hypotheses. Both deduce testable consequences. Both eiiminate those hypotheses whose consequences do not withstand testing. Beth arrive at empirical laws about the connections cf phenomena. Both believe in this unity of method. The function of theory is to furnish a context in which facts can be systematically organised. Theory is a compound of two elements: The first element is a language for promoting systematic methods of

reasoning. In this sense theory is a set of tautologies. It is a filling system. The second element lies in the substantive hypotheses for deriving the essential features of concrete reality. In this it is judged by its predictive power. It is the way in which we perceive facts and we cannot perceive facts without the aid of theory. Buta completely realistic theory, according to Friedman, is parily a strawman. The truth or falsehood of a theory is not relevant. What is relevant is the consistency of its logic. To this concept of theory construction Koopmans has two objections: One. that for having a refutable theory the postulates must be supplemented by a description of the implications by which such a theory stands or fails. Two, that one is a roundabout way of specifying the content of a theory open to empirical refutation. Any

theory

is necessarily

provisional.

It is subject to change

with the advance of knowledge. The validity of the theory is conditional upon the realism of its premises. Theory is ‘‘a deductive system designating the primitive concepts in terms of which all other concepts in the science can be defined, and the primitive propositions or postulates from which

... all other

propositions

in the

science

can be deduced as theorems.”

Theory is a heuristic device, that is, the art of discovery in logic or the methed in education by which

a

student

is set

to

find

out

things for himself. A theory is scientific, if it is falsifiable. That is, theory is scientific, if ‘‘its adequacy were tested by appeal to the empirical

subject-matter

of the

science’?

in some

complete only when its probability has been tested.

manner.

It is

The superiority

of a theory is measured solely by its explanatory power. A theory is tested by comparing the predicted effects with the actual effects. Koopmans

classifies

analysis

as

positive

and

normative.

In

positive analysis conclusions or predictions are tested by observation. In it we have to use

our

powers

of thought

fully.

analysis our concern is with the recommendations

In

normative

of such action or

actions as can achieve our given ends. The first task of the economist is to get a grasp of the economic reality. The subject-matter of economic theory is not objective in the sense either of the immediately inspected sense data or the

verified inferred common sense objects, as Northrop asserts.

Econo-

mic theory is an edification of reality in its specific forms, not all forms. After all, reality is a continuum of cases from certainty to

Economic Science as it is: A Synoptic View

49

increasing degrees of uncertainty. Economic theory is concerned with deductive enquiries. In such enquiries the reality principle is not always present. The premises of economic theory can be completely a priori. But economic theory may not absolutely be lacking in empirical content. However, its applicability to a complicated situation is often slight. It may be drastically simplified by the copious use of qualifying conditions. Pure (and formal) economics is a kind of astronomy of the economic uniyerse. It discusses the mutual determination of the positions and magnitudes of various economic variables or quantities. Both pure economics and astronomy proceed by observation rather than by controlled experiment. Both lean on the concept of general equilibrium through the solution of simultaneous equations. Pure economics appeals to general uniformities rather than to particular instances. It addresses itself to the form of conduct rather than its substance or content. Economic laws are explanatory, not admonitory. The economist’s object is to understand events with reference to general principles.

Friedman’s thesis is that positive economics is independent of normative or value judgements or any particular ethical position, and hence the validity of economic theory is to be tested by the accuracy of its predictions, and not by the descriptive reality of its premises. According to him, verification in social science like economics is difficult largely because experiment under conditions resembling real life is impossible and because influences in social science like economics are far too many. But social science like economics has greater access to direct introspection and direct observation of individual decision makings. Such a formalist trend has been influenced by the neo-Kantist philosophy developed by Rickert and Weber. This trend regards formalism as a formof idealism. Idealism is positivistic. It is another realism. Reality is a construct of the mind. Reality is another realism. The world is a creative act of thought. The function of social science is to provide concepts which allow us to arrange empirical realism in a valid manner. The natural datum of positive (formalist) economics is choice or conflict of choice.

Positive generalisations in economics have their limitations. Firstly, there cannot be many generalisations of high probability in economics

because

economics

has

to handle a complex, impulsive

and unstable subject-matter. Secondly, pure reasoning cannot disinter the economic motives of man. Thirdly, familiarity with the subject-matter breeds contempt for special knowledge about it. It impedes objectivity. It promotes confusion between positive analysis and normative judgement. Fourthly, control of the unruly vari-

ables is impossible. riment.

No

reliance

can be placed on controlled expe-

Testing of hypotheses is thus rendered

obtrusively difficult.

This too entails confusion. Fifthly, there is the further difficulty of separating the more pertinent forces from the less through the process of observation or introspection. Finally, intermingling of facts

Studies in Economic Analysis and Policy in Retrospect

50

and reasoning slows down progress in economics. Economics can progress through interaction of observation and reasoning. That is, if at the beginning of analysis facts are recognised by postulates, then at its end conclusions (predictions) are subjected to further scrutiny and facts are not inducted through a backdoor at an advanced stage of analysis. Observation proceeds from the casual (incidental) to the systematic, whilst reasoning proceeds from the casual! to the more gerleral and formal. It starts from postulates. Postulates are premises. Premises are not conclusions or predictions. Observation feeds upon experimental work as in physical sciences, whereas reasoning feeds upon theoretical work in these sciences. But in economics there is not so much of this separation or segregation, rather they are closely intertwined. As Hicks has put it, pure economics has a remarkable way of producing rabbits out of a hat—apparently a priori propositions which apparently refer to reality: so much is derived from so little. Economics is informal and economic facts are all around us.

Let us elaborate the above. Lowe argues that the ability to predict should not be regarded as the decisive criterion for scientific economics.

Whether economics is, or is not, capable

of prediction

is no longer merely a methodological concern but a question cardinal importance for the organisation of economic life.

Guruitsch distinguishes between

social and

natural

the following manner : The natural scientist observes and

sciences

of

in

interprets

the objects and especially the events with which he deals. He tries to ascertain the conditions under which certain events occur and to express in the form of laws the regularities of their occurrence. Besides, he contrives theoretical constructs, such as atoms or energy whose purpose is to make possible the rationalisation and systematisation of a wide range of phenomena. He and he alone observ-

es the phenomena to be explained and conceives of the constructs by means of which the explanation is given. Neither the natural phenomena nor the theoretical constructs have any self-interpretation or self-comprehension imputable to them. On the other hand, in social sciences, the objects are actors having a comprehension of their own of their situation, independent of the interpretation of their behaviour on the part of the social scientist.

The behaviour of

these objects is determined by acfion directives (goals) and possesses some spontaneity.

_ The physical or chemical world has a certain *‘invariant

general

form.’’ The uniformity of chemical reactions or the uniform movement of bodies or growth of plants makes it possible to formulate theoretical questions and generally valid physical, chemical or

biological laws. No such uniformity exists in the economic world which exhibits an immense variety of forms and historical processes. A

single order

of Nature

exists and

has

existed but there is an

Economic Science as it is:

A Synoptic View

|

unlimited and constantly changing variety of economic systems. Economic life appears to lack uniformity.

orders

or

In the words of Solow, economics, like physics or astronomy, has a body of fairly simple low-powered theory and a body of rather fancy high-powered theory. Economics, to quote Northrop, claims for its theory the same validity for everybody that physics claims for its laws and verified propositions. But, as Solow shows, there is a subtle difference between economics and physics. In physics the simple theory is mastered to gain access to the fancy theory. Many spectacular practical achievements seem to have come from the fancy theory. In economics the fancy theory is mastered before anyone is trusted with the simple theory. The practical utility of economics comes not primarily from its highpowered frontier, but from fairly low-powered reasoning. This is so because the data are not ava lable to give precision to high-powered theory. Often the high-powered theory of today is the low-powered theory of tomorrow. Moreover, the subject-matter(s) of physics {and chemistry) is (are) unfamiliar, whilst that of economics is familiar. The former requires plenty of reasoning to link laws with observations, whereas the latter is capable of direct observation. Its laws possess the quality of immediate obviousness, to quote Robbins. They are the very stuff of which everyday life is made. The scope of economic conclusions (or predictions) is over-estimated when economic theory is regarded as concerned with economic reality in general and built up by absorbing bits of observation. In other words, it is exaggerated when casual empiricism becomes a sufficient basis for economic analysis. Its remedy

lies in more and yet more systematic observation and direct or indirect testing of postulates. The evil effects of the exclusive concern of positive economics with the implicatory phases of investigation have been the neglect of formulation of problems as well as the neglect of the discovery

of those data the implications of which can be tested scientifically. Another evil effect is that wide generalisations are illegitimately held to be superior in all cases to partial empirical findings. The next evil effect has been that the theorist tends to seek solace in the phantom of certainties of formal logic or mathematics. This, of course, gains in generality but loses in applicability. More and

more artificial hypotheses

have

to be introduced.

But

these by

themselves cannot cure the infirmities of economic science. Asa result, pure economics becomes an amusing toy, and one is reminded of Marshall’s word of caution that ‘‘general theories may help one to get into the saddle but they may prove to be encumbrances on a long journey.”” Another danger of merely positive study in economics is that social problems will be treated by demagogues and fanatics with no interest in logical reasoning and no knowledge of economic techniques. So there is a reaction from the above It has been increasingly realised in modern times that ecotrend. nomic theory must be built upon an adequate empirical base and

52

Studies in Economic Analysis and Policy in Retrospect

should be brought more intimately in touch with actual conditions and problems. Even the most theoretical economists (like Walras and Pareto) have not resisted the temptation of tendering advice on the basis of pure theory of causal sequences and acertain knowledge about the world derived from a simultaneous conspectus of the realm as a whole. Economic theory is of general validity since it is an embodiment of rigorous formal deductions from premises founded on common experience, which is clearly discernible. By contrast, economic policy amounts to the demonstration of the implications of certain value judgements, that is, the formulation of criteria of judging what is desirable or undesirable in economic affairs. These criteria are taken over from other social sciences, such as philosophy or are given by some political authority and are, therefore, fiduciary

or fiat-like in nature. In Schumpeter’s opinion, the two roots of economic science are: one, philosophy, which avers that social activities constitute the fundamental problem; and two, interest in the practical problems. of the day, which can be substantiated by quoting Carlyle, ‘“‘Wonder is the beginning of philosophy; social enthusiasm is the beginning of economic science”. On this view, scientific economics was forged in the fire of ideological debates. Or, as Boulding remarks, econcmics has developed, by and Jarge, as a by-product of propaganda for policies of various kinds. It is the promise of fruit, says Pigou, and not that of light, that chiefly merits our regard. Economics is to be guided by practical instinct. In the words of Comte,

“It is for

the heart to suggest our problems: it is

for the intellect to solve them... The only position for which the intellect is primarily adapted is to be the servant of the social sympathies.” ‘‘In our most theoretical moods,” notes Whitehead, ‘we may be nearest to our most practical applications.” Welfare economics, i.e., economics of economic policy, has three dimensions, viz., pr ces, quantities and maximisation of welfare. It is different from pure (price) economics, which has got only two dimensions, namely, prices and quantities. It is also different from ethics which has got four dimensions: prices, quantities, maxi-

misation of welfare, and maximisation of welfare in a given sense. Welfare economics is like astrology. Both study the effects of changes in given magnitudes. Both relate a welfare function to human welfare. Both adjudge positions of given bodies. But

astrology has been

more successful

than welfare economics for the:

evident reason that it has better personal and statistical evidence. In the old, classical welfare economics, the flourishes of the abstract

theory are kept in check by a desire to preach or advocate social amelicration. All classical analysis is teleological or purposive. It runs interms of purpose. The classicals have definite proposals. for what they deem to be social improvement. They offer a body of precepts for action, ‘an agenda of the state’. One can easily detect in their writings a persuasive moral tone. They accepted as.

Economic Science as it is: A Synoptic View

53

their business the suggestion of a code of economic policy and sought in the utility theory a sure basis for the prescriptions of economic policy. They were keenly interested in value as well as in riches. Value was considered a problem of economic magnitudes, whilst riches that of economic welfare. The classicals held their policy recommendations to be scientific results that followed directly from scientific analysis, though not from purely economic analysis. To recollect, classical economics began as an attempt to classify and to resolve the contemporary issues of political dispute. It was meta-political. It tried to set up standards of judgement on economic desirability, such as to define riches, to expound a notion of economic optimum, and to offer guidance to social policy. It laid down maxims of economic policy. It indicated which policies were likely to be conducive to social welfare and which ones were likely to lead to waste and impoverishment. Pigou as an exponent of this thought rejected the idea of economics being a normative science. According to him, economics forms the basis of an art; it is not an art in itself. It does not directly enunciate the precepts of government policy. But as a realistic positive science it is guided by practical instinct. Its declared purpose is to make easy practical measures to promote welfare. Despite this, the Pigovian welfare economics is essentially normative insofar as Pigou’s investigation of the causes of welfare, in fact, prescribes economic policy by implication. The recommendatory force of his welfare postulates is very strong. His welfare system wants a truly objective basis. It rests on assumptions and criteria of subjective nature and of dubious value.

By difference, the new (modern) welfare economics develops propositions which are scientifically free from value or ethical judgements. Value judgements (statements) are evaluative and/or prescriptive (persuasive or emotive). They assert the moral worthiness of certain things. They cannot by their very nature be true or false. They cannot be proved or disproved. They can appeal to us because they agree with our ethical approach. On the other hand, factual (scientific) judgements (statements) are descriptive. They describe facts asthey are. Hence, they are either true or false. They can be verified or refuted under ideal conditions. A second feature of the new welfare economics is that it supplies criteria of general or even universal validity on the ground of which one can decide whether acourse of action is desirable or otherwise from the economist’s point of view. Thirdly, it eschews direct prescriptions. It provides such guidelines for policy as are commensurate with the general standards of objectivity. Fourthly, it is value-free.

Assuch,

itis part of the

general

body

of economic

theory concerned chiefly with policy. It is a science which finds out which isthe best thing to do in various situations. In it the economist is stated to be perfectly objective and scientific, assuming that he advocates a change in economic institutions or regulations, a change which is bound to yield increased efficiency.

An

attempt

at reconciliation

between

the

old

and

the new

54

Studies in Economic Analysis and Policy in Retrospect

welfare economics would boil down to this that policy reeommendations in economics may have either positive or normative bias but in making recommendations they must be distinguished. Besides, welfare

economics,

whether

old

or

new,

is

teleological.

The teleological trend in economics combines rigorous analysis with teleological assumptions. It deals with particular ends or purposes, e.g., avoidance of fluctuations, full employment, and greater economic equality. It claims to make available a much surer guide to policy without impairing the positivist character of economic generalisations. It diagnoses economic ills and suggests remedies thereof. Even when abstract, it reveals a tendency to be of use in the worldly affairs. It is eclectic, having blended theoretical analysis with practical bias. It pleads strongly for greater realism in economics. It attacks abstract speculation. It cherishes certain reform ideas. It considers normative implications to be inescap-

able and wants them to be faced squarely. The teleological trend has stimulated the present prescriptive approach. The latter starts from general premises based on widely recognised value judgements. It integrates a method of approach or an apparatus of analysis of economic problems with a system of explicit or implicit prescriptions intended to guide policy decisions in general situations. It is different from the ad hoc or the taxonomic approach. The latter applies to a specific situation. The economic adviser has to be a good economic theorist. He has to possess the necessary technical equipment for knowing the possible interrelations of economic forces. He has to know how and in what directions and to what extent a given policy will produce its potential effects so that he can take a decision on it. He should be able to see the way in which the determinants are likely to work themselves out and the range of phenomena which they are likely to affect. Economic issues require the specification of the direction of the net outcome of the influences operating contrarywise, that is, the influence cf one variable on another which calls for a specification of two things—the magnitudes and the signs of those influences. This is why it has been aptly remarked that for serving asa guide to policy economics needs ‘“‘the Jamp of assured knowledge and the sharp sword of right analysis.”’

Economic theory will supply the adviser with the tools of analysis, will teach him how to use logic within the ambit or rubric or frame-

work of known data, how to arrange factsin the order of their magnitudes or in the order of their place in time, will also provide him with an insight or at least an inkling into the variables on which a given determinant operates, and will finally specify some measurable quantity on which the upshot of a problem turns. The key-note of the works of the leading English neo-classicals like Sidgwick, Marshall and Pigou is common-sense pragmatism, their object being to build up a workable economic theory designed for practical use and not for formal elegance and logical stringency. None-the-less,

the role of economic

theory in the solution of

Economic Science as it is: A Synoptic View

55

practical problems is extremely limited. In the first instance, it is not self-sufficient. It has got to be supplemented by judgement and intuition for isolating and identifying the more significant aspects of a problem because the available empirical facts are generally very imprecise. Quantitative comparisons of alternative situations are not always practicable. So an amalgam of logic and intuition is essential for economic interpretation in its highest form, as Keynes noted. No practical issue can be settled wholly on the basis of economic theory, and ultimately we must consult our ethical instincts and common-sense to decide how far we could be scientists and how far we would be reformers, so said Marshall. On the second count, economic theory cannot by itself supply a detailed

specification of the environment to which it is to be applied. On the third score, beyond a certain point economic theory may well become a handicap rather than a help as the desire to reach clearcut answers may tempt the economist to simplify his analysis to such an extent that his conclusions cannot be applied conveniently to practical problems. The other odd against economic theory is. as Robbins pointed out, that in natural sciences the transition from the qualitative to the quantitative is easy and inevitable but in social sciences it is either impossible or bestrewn with peril and difficulty. Robbins further pointed out that the economic theorist was confronted with the lack of constants in the

economic system and had,

in consequence,

laws

movement

to rediscover

various

of gravitation

from

to movement.

To conclude, the present era is one of social technology or social engineering. The task of a social engineer is to design social institutions and to reconstruct and run those already in existence. There are two types of social engineering: One, piecemeal, when small adjustments and readjustments in the existing institutions are desired, and two, Utopian, when remodelling of the whole society is contemplated. The economist is a social scientist. He is best qualified among the social scientists to make judgements and recommendations on tle question of distribution of welfare in a community.

But while

taking upon himself

the task, he must make

it

quite clear and explicit on what basis he has arrived at those recommendations. If his recommendations are to command general assent or approbation, then his judgment on a given norm must conform tothe judgement of the public. He may not -bein a position to go against public opinion but he must lead rather than interpret it. There may exist wide areas of choice where the majority of people are unable to make a judgement because they are ill-equipped for it. One example is where the preferences of the community are inconsistent andcontradictory. All the same, he must assume full responsibility for the advice tendered by himself.

Reverting to the role of economic theory in the making of economic policy, we ean add that when a person bereft of knowledge of economic theory arrogates to himself the task of economic policy-making, the latent danger is that the policy-maker who is

56

Studies in Economic Analysis and Policy in Retrospect

deficient in theoretical knowledge will not reason in a sound manner and hence the inferences drawn by him cannot be right or will be right only by accident. He will fail to reveal the less obvious features hidden froma careless eye in the existing situation, as an economist well adept in theory can. The economist has a part to play in the formulation of economic policy, for we have to face the fact that economic propositions, however carefully they may have been distilled according to the canons of logical purity, will have to be transmitted to economic policy and in the practical execution of policy somebody must face the final necessity of making ethical judgements, thus observes Myint. He goes on: We might palm that responsibility on to the hypothetical economic planner or the statesman (‘the practical man’). But so long as economic policy cannot be made fool-proof like a motor-car which can berun without any profound knowledge of motor mechanics, that statesman or practi-

cal man must, to some degree, be either an economist or advised by economists. Futurism in economics has its severe limits. Economic prognostication is extremely difficult. The changes in economic data are not accurately predictable. The multi-form reality cannot be reproduced in toto in the economist’s model, however comprehensive or pervasive it is. The economist is unable either to obtain facts with which to test his theories or to put his resultsin a form in which they can be tested empirically or, in the alternative, he

claims too much in spite of the awareness of the limits of his science. Perhaps the best course left to him lies in his being short on forecasting but long on assuming. He may as well contend, on the authority of von Karman, that prophecy is not a scientific activity,

and hence not the task of science.

Lastly, a word about the distinction between models and theories. The prime tool of a social science is the model. A model is a way of setting forth hypotheses regarding a particular problem. It isa form of explanation. It is a system of simultaneous or structural equations expressing all the reciprocal relationships which connect measurable economic quantities (and thereby govern the economic process). Itis a set of functions interconnecting an array of variables and showing coherence and consistency. It is the theorist’s edification or simplification of a given theory. It is a construction or idealization in which certain elements of the state or process that we desire to examine are selected, such that the interrelations and interactions of these elements may be decided by reasoning with a view to enhancing our understanding of that state or process. A model seeks to reproduce some of the relations between familiar elements. It is not a comprehensive reproduction of all the relations (i.e., of the social whole). It provides a simplified and idealised image of certain aspects of human activity. Its consiruction is the product of a basically speculative research. It organises our intuition and imp¢ession, suggests interesting questions, offers testable conclusions, maps in advance the empiricist’s or the

Economic Science as it is: A Synoptic View

Se.

Statistician’s procedure and finds a place for hypotheses and gives them an exact expression.

Models are different from theories in the following respects: They deliberately treat of only a few selected relationships. They purport to be closed systems. The conclusions follow, of necessity, from the axioms. The relationships are quantifiable. .Ina nutshell, a model represents the translation or rendering of theory into the form required for its numerical verification. Koopmans looks upon theory as ‘‘a sequence of conceptional models’’. Such models express different aspects of more complicated reality in a simple way. First, these aspects are formalised by the method of isolation. Then, they are related with reality by the method of approximation (or aggregation based on the principle of inertia of large numbers). Each model is defined by a set of postulates. Those postulates express certain aspects of reality. Their implications are developed in relation to those aspects of reality. The simpler models are prototypes of other models which may be more realistic but also more complicated. They may represent complete pieces of reasoning. They can be regarded as the logical core of economics. Truth may be empirical or logical. Empirical truth is concerned with the verification of theories. Legical truth is concerned with the tracing out of the implications of postulates. In the former, important aspects of reality cannot be ignored; in the latter, they have to be. The former is concerned with realism, the latter with rigour. The former should precede the latter but the latter must follow the former.

Models are an essential aid to clear thinking. They make explicit and rigorous what might otherwise remain implicit and vague and self-contradictory. They are antidotes to excessive rigidity of thought and exercises in searching for interdependent relationships. They act as thought-therapy and as guides to the framing of relevant questions. They may not possess high predictive powers but they will afford an inkling into the working of the system. To be useful, models must employ concepts that are clear and meaningful and have an empirical basis. The essential assumptions must be elucidated. Models must be refutable by empirical evidence. They must lay down sufficiency conditions. They must pose a set of ‘questions pertaining to the observable data. They must contain estimates of territorial and extra-territorial factors. The last two requirements make models approximate theories. For being useful models should focus analysis on relationships that are important for comprehending reality and strategic for purposes of policy. Models are to be judged by their relevance to the problems under investigation, their logical consistency, their adequacy to reality, including their correspondence to patent, transparent facts. The models of operations analysis are oversimplified pictures of the real world. The modél—builder must be alive to the fact that what is left out is often as important as whatis putin. To wit, there is no magic in mathematics.

58

Studies in Economic Analysis and Policy in Retrospect References

. P.T. Bauer, Dissent On Development.

. W.J. Baumol, Economic Theory and Operations Analysis. . M. Blaug, Economic Theory in Retrospect. . K.E. BRwWN

Boulding, ‘‘Welfare Economics, Vol. I.

Economics’?

in A

Survey

of

Contemporary

. D. Braybrooke, Philosophical Problems of the Social Sciences. . D.W. Bushaw and R.W. Clower, Introduction to Mathematical Economics.

. JS. .

. . . .

Earley,

‘‘Limitations

of Economic

Theory’’ in Economic Theory in:

Review. W. Eucken, The Foundations of Economics. E. Fossati, The Theory of General Static Equilibrium. L.M. Fraser, Economic Thought And Language. M. Friedman, Essays in Positive Economics. D.R. Fusfeld, The Age of the Economist. C. Gide and C. Rist, A History of Economic Doctrines. R. Hall, ‘*‘The Place of the Economist in the Government’’in Oxford Economic Papers, June 1955.

. R.

Hall,

‘Reflections

on

the Practical

Economic Journal, December 1959. . R.F. Harrod. ‘‘Scope and Method

September 1938. . R.L. Heilbroner (ed.), Economic Lowe and A. Guruitsch.

Application

of Economics’?

Means

And

of Economics”’ in

in Economic

Social Ends,

Journal,

papers by A.

. P.D. Henderson, ‘‘The Use of Economics in British Administration’’ in Oxford Economic Papers, February 1961. . J.R. Hicks, ‘*‘The Foundations of Welfare Economics’? in Economic Journal, December 1939. . J.R. Hicks, Capital and Growth. . W.A. Johr and H.W. Singer, The Role of the Economist

. H.G.

Johnson,

‘*‘The

Taxonomic

Economic Journal, December

. N. Kaldor, ‘‘The Irrelevance Journal, December 1972.

Approach

to

as Official Adviser.

Economic

Policy’?

in

1972.

of

Equilibrium

Economics’?

in Economic

. F.H. Knight, The Ethics of Competition.

. T.C. Koopmans, Three Essays on the State of Economic Science. . R.G. Lipsey, An Introduction to Private Economics.

. A. Lowe (ed.) , Economic Means and Social Ends. . R.L. Marris, ‘‘The Position of Economics and Economists in the Government Machine”

in Economic Journal, December

1954.

. A. Marshall, Pure Theory (Foreign Trade and Domestic Values). . A. Marshall, The Principles of Economics. . H. Myint, Theories of Welfare Economics.

. G. Myrdal, The Asian Drama, Vol. 11, Appendix III. . F.S.C. Northrop, The Logic of the Sciences and the Humanities. . A.C. Pigou, Economic Essays and Addresses.

. A.C. Pigou, The Economics af Welfare. . A.C. Pigou, Memoirs of Alfred Marshall. . K. Popper, The Poverty of Historicism.

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59

38. A. Radomysler, ‘‘Welfare Economics and Economic Policy”’ in Economica,

39. 40. Al. 42. 43. 44, 45. 46.

August 1946.

L. Robbins: Nature and Significance of Economic Science. L. Robbins, The Economist in the Twentieth Century. L. Robbins, The Theory of Classical Economic Policy. L. Robbins, Article in Economica, August 1938. L. Robbins, Article in Economica, February 1953. E. Roll, A History of Economic Thought. J.A. Schumpeter, Economic Doctrine and Method. T. Scitovsky,

‘‘A

Note

on

Welfare

Propositions

in

Economics’’,

in

Review of Economic Studies, November 1941.

47. G.L.S. Shackle, Nature of Economic Thought. 48. G.L.S. Shackle, A Scheme of Economic Theory. 49. P. Streeten, ‘‘Economics and Value Judgements’ in Quarterly Journal of Economics, November 1950. 50. R.M. Solow, Capital Theory and the Rate of Return. Welfare’? in Economic Journal, ayli J. Tinbergen, ‘‘Productivity and March 1952. Tress, ‘‘The Contribution of Economic Theory to Economic Prognostication’’ in Economica, August 1959. H. Tyszynski, ‘‘Economic Theory as A Guide to Policy’, in Economic Journal, June 1955,

aye R.C. 53.

CHAPTER

FIVE

Poverty in English Classical Political Economy The prime business of this chapter is to make a modest attempt to present an impartial review of the attitude of the English classical economists towards the question of poverty during their time and to describe and analyse their views on it as far as possible in their own words. It starts off with a short account of the socio-economic conditions of the period and ends with general observations on the subject. Between these sections, the contributions of the individual economists are sought to be explained critically.

I. The Socio-Economic Background The Industrial Revolution and the Napoleonic wars created certain economic maladjustments in Great Britain. The misery, which befell large sections of the working people, was often, though not always, owing to a fall in wages, for in some industries they rose. But they suffered likewise from the rise of prices, especially from the high prices of bread before the repeal of the corn laws and from those sudden fluctuations of trade, which, ever since production was on a large scale, had exposed them to recurrent periods of bitter distress. The effects of the Industrial Revolution proved that free competition might produce wealth without producing well-being. In 1809 Baldwin was constrained enslaved the mind, whereas national enlivened the social character.?

to comment that poverty prosperity elevated and

During the first half of the 18th century, the agricultural prosperity of England had been great. But towards the end of the century such distress prevailed that it seemed as if there were too many people for the land to support. The evil effects of the Industrial Revolution, viz., unemployment, poverty, disease, and riot,

had already manifested themselves.® Even before England’s industrialization gathered momentum, poor relief had become ‘a venerable problem’. Its cost was traditionally borne by local assessments, the rates. In form this relief was mostly ‘outdoor’, granted to the recipient in his own home, not

Poverty in English Classical Political Economy in a work-house. The Settlement Acts protected the poor of its neighbours.

61 each

parish

from

The immediate condition of the poor was closely bound up with the price of bread, their principal diet. This price rose steadily between 1775 and 1825 to the point at which many employed workers could not support themselves on their wages. The various supplementary grants in aid of wages, begun in 1795, had tied the amounts awarded to the price of bread. Humanitarian motives had spurred local justices of the peace to adopt this system. Nevertheless, its effects were little short of disastrous. What was intended to be a minimum wage rapidly became a maximum. The grants themselves turned out to be mostly benefits for farmers who hired labourers at substandard wages in the full knowledge that poor relief would be forthcoming. There was no other way more effective than this to dull the normal incentives of labour, diminish their working efficiency and demoralise their morale.® During the last quarter of the eighteenth century unemployment tended to be explained in terms of the principle of population, the most primitive of all theories, as Schumpeter opines.® The relief granted to the unemployed persons and the subsidies granted to persons employed at less than Jiving wages by the poor law authorities gave rise to administrative abuses. For example, it made it possible for ‘local potentates’ to shift part of their wage-bill on to the poor rate. Unemployment and employment at substandard terms and conditions entered into the concept of poverty or indigence. The poor laws intensified the danger of over-population. If workers were sure of subsistence, whether employed or not, active or idle, drunk or sober; if rewards failed to distinguish between the efficient and the inefficient, then the prudential check could not

possibly operate. Men married as their passions directed them to, especially since their lot before marriage was little better than after it. Il, Adam

Smith

Adam Smith takes the real price of labour as the measure of its richness or poverty: ‘‘The labour is rich or poor, is well or ill rewarded, in proportion to the real, not to the nominal, price of his labour.’’’? The real price of labour is expressed in terms of ‘‘the necessaries and conveniences oflife’. Elsewhere he adds ‘‘amusements” as another determinant of man’s economic status: ‘‘Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of life.’’§ Not satisfied with these measures, Smith devises another in terms of

the quantity of labour commanded or purchased: ‘‘He (man) must be rich or poor according to the quantity of that labour (labour of other people) which he can command, or which he can afford to purchase.”” However, @poor man’s “‘patrimony” is ‘‘the strength

and dexterity of his banda?

62

_

Studies in Economic Analysis and Policy in Retrospect

Smith classifies the poor under two broad types. Under the first type he places those poor who are sober and industrious, whose families are larger, constituting a reservoir of useful labour supply, and whose capacity to supply such labour is not substantiaily eroded

by rise in the prices of luxuries consumed by them. Under the second type he places those poor who are dissolute and disorderly, who persist in the indulgence of luxuries despite price-rise that diminishes their capacity to bring up children and entails distress to

their families,

which are smaller, who eat a food that is scanty and

unwholesome and whose children grow up to

be

public

nuisances:

“It is the sober and industrious poor who generally bring up the most numerous families, and who principally supply the demand for useful labour. All the poor indeed are not sober and industrious and the dissolute and disorderly might continue to indulge themselves in the use of such (‘luxury’) commodities after this rise of

price in the same

manner as before without regarding the distress

which this indulgence might bring upon their families. Such disorderly persons, however, seldom rear up numerous families; their children generally persisting from neglect, mismanagement, and the

scantiness

or unwholesomeness

of their food. If by the strength of

their constitution they survive the hardships to which the bad conduct of their parents exposes them; yet the example of that bad

conduct commonly corrupts their morals; so that

instead

of being

useful to society by their industry, they become public nuisances by their vices and disorders. Though the advanced price of the luxuries of the poor, therefore, might increase somewhat the distress of such

disorderly families, and thereby diminish somewhat their ability to bring up children; it would not probably diminish much of the useful population of the country.”?° That the working class budget was complex and sophisticated in Smith’s age is evident from his analysis of changes in its cost-ofliving. The workers consumed potatoes, carrots, turnips, cabbages, apples, onions, fuel (like wood and coal), coarser woollens and linens, coarser metals, furniture, soaps, candles, salt, leather and

liquor.™ Smith distinguishes between what a man is interested in and what is to his interest. Man is sometimes ignorant of the latter: ‘‘But

though the interest of the labour is strictly connected with that of the society, he is incapable either of comprehending that interest, or of understanding its connexion with his own.’’!?

Although poverty does not prevent births, yet being unfavourable to the rearing of children it restrains multiplication of the population,

Insofar as the labouring classes form the greater

part of every

country, anything which improves their economic condition and makes them happy and flourishing also, of necessity, improves the

economic condition of their country and makes it happy and flourishing. Says Smith, ‘Servants, labourers and workmen of different kinds make up the far greater part of every great political society. . .

Poverty in English Classical Political Economy

63

what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society ican surely be flourishing and happy, of which the far greater part of the members are poor and miserable.””}®

From beginning to end the Wealth of Nations abounds in a comparative study of rich and poor countries (societies/nations) from different angles. The rate of increase of national wealth

determines

the

demand

for labour and hence the labourer’s wage. The liberal reward of the ‘‘labouring poor’”’ is at once the necessary effect and the natural symptom of increasing national wealth, whereas their scanty maintenance is the natural symptom of

stationary national wealth declining national wealth."

and

their starving

condition

that of

The wages of labour are the highest not in the rich countries but in the most thriving, or in those which are growing rich, the fastest of all. Smith speaks eloquently of a progressing society because it is only in such a society that the labouring class, which constitutes the bulk of the poor, enjoys maximum happiness and comfort: ‘‘It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, ... that the condition of the labouring poor, of the great body of the poor, seems to be the happiest and the most comfortable . . . The progressive state is in reality the cheerful and hearty state to all the different orders of the society.’’?® The employment of ‘‘a multitude of manufacturers” by a man adds to his riches, whereas the maintenance of ‘‘a multitude of menial servants’ adds to his poverty.'®

In a declining country many who had been bred in the ‘‘superior classes’? would be glad to seek employment, not being able to find it in their own business, in the lowest, where the wages would be reduced to the ‘‘most miserable and scanty subsistence” level.” Heilbroner considers it remarkable

sociological

reality

is so

sharp,

does

that

‘Smith,

whose

eye

for

not comment on the conse-

quences of reducing the condition of the labouring man from the modest affluence to which the Wealth of Nations initially raises him, to the miserable subsistence to which he is finally condemned.’ Having taken note of the fact that life in the progressive state is ‘‘cheerful’”’ and ‘‘happy” and that inastationary one it is ‘“‘dull’’ and ‘‘hard’’, Smith passes over without comment the enormous social strains that might be expected to ensue from a descent from one state to the other. This is all the more curious in that he has himself remarked that ‘‘the labouring poor will not now be satisfied with the same food, clothing, and lodging that satisfied them in former times.” ‘Yet, as to the wrenching dislocation implicit in the full decline to the final Malthusian terminus, he

is silent.’1°

64

Studies in Economic Analysis and Policy in Retrospect

Smith is pained to note

that

‘‘everyone

complains

about

the

conspiracies among working men to obtain higher wages, but no one notices the fact that their employers are everywhere and always engaged in about conspiracy to hold wages down.’’!® Masters and workmen have a conflict of interests with respect to wages, and the weakness in bargaining power of the Jatter ordinarily gives the advantage in any dispute to the former.??

Smith saw a conflict between workmen and their masters as each side tried to combine to influence wages: ‘‘It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other

into

a compliance

number,

can

with

combine

their terms. much

more

The masters, being fewer in easily;

and

the

law,

besides,

authorises or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of Parliament against combining to raise it. In all such disputes the masters’ can hold out much longer. A landlord, a farmer, a master manufacturing, Or merchant, though, they did not employ a single workman, could generally live a year or two upon the stocks which they have alréady acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him, but the necessity is not so immediate.’’*1 The employers act in concert to keep down wages: ‘‘Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.’’**

The working class is always on suffrance in the matter of legislation. A regulation in the interest of the workmen is just and equitable but not that in the interest of their masters; ‘‘Whenever legislature attempts to regulate the differences between masters their workmen, its counsellors are always the masters. When regulation, therefore, is in favour of the workmen it is always

and equitable; but it is sometimes otherwise masters.” Smith is highly which is loaded the industry which powerful, that is

when

in favour

the and the just

of the

critical of the contemporary mercantile system heavily against the poor and the indigent: ‘‘It is. is carried on for the benefit of the rich’ and principally encouraged by our mercantile system.

That which is carried on for the poor and the indigent is, too often, either neglected or oppressed.’’?8 Smith recommends that the workmen shculd be paid subsistence wages sufficient for the maintenance of themselves and their families. so that their supply is continuously replaced: ‘‘A man must always live

by his

work,

and his wages must at least be sufficient to main-

tain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first.

generation.”

Poverty in English Classical Political Economy

65

Further on he declares, ‘“‘It is but equity, besides, that they who feed, cloth and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged.’’*4

Hollander regards Smith’s failure to discuss the role of government in poor relief, apart from his call for the abolition of the settlement laws, as an evidence for the proposition that he did not consider the problem of unemployment to be serious, at least in the absence of artificial impediments to mobility.?° Smith upholds heavier highway tolls upon luxury carriages than upon freight wagons in order that ‘‘the indolence and vanity of the rich (be) made to contribute in a very easy manner to the relief of the poor.”

Although Smith glorifies the division of labour, yet he is not blind to its shortcomings. He shows how it inevitably stultifies the working classes, much, if not, the bulk of mankind and on that ground he advocates government intervention. The labourer’s ‘dexterity at his own particular trade seems... to be acquired at the

expense

of his

intellectual, social, and martial virtues.

But in

every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.’’*°. In his earlier work (Theory of Moral Sentiments) Smith had paid a glowing tribute to the rich for their sense ofjustice, acting as they did under the aegis of the Invisible Hand: ‘‘The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands

whom they employ be the gratification of their own vain and

_insati-

able desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of society, and afford means to the multipli-

cation of the species.’’*’ In his Lectures (edited by Cannan), another earlier

work

of his,

Smith had laid down the very end of government to be making wealth secure and defending the rich from the poor.“®

But in his later work, the Wealth of Nations, he was more guarded: ‘‘Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor or of those who have some property against those who have none-at all.’’?® Elsewhere he stated that in some trades ‘‘the competition of the poor’ had a depressing effect on ‘the reward of the rich.”’*°

66 Ill.

Studies in Economic Analysis and Policy in Retrospect Thomas

Robert Malthus

Haney maintains that ‘of more importance, perhaps, than any one factor in shaping Malthus’ thought was the condition of England just prior to and during the time at which he wrote’.*? Malthus’ Essay was ‘the theory of an age of poverty’, and he wrote it ‘with his eye on the’ Poor Laws’. His intentions were undoubtedly benevolent but his ‘benevolence seemed to be concealed behind dark clouds of gloom’.

It has been remarked that the Essay might be ‘construed as an answer to Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations’ and that ‘it would be an apt procedure to rename the work of Malthus An Essay on the Causes of the Poverty of Nations’*®,

According to Toynbee, Adam Smith had concentrated all his attention on a large production, whilst Malthus directed his inquiries not to the causes of wealth but to the causes of poverty, and found them in his theory of population.*4 He sought to cure pevieaty and unemployment and specially to repeal the poor aws. In his Essay Malthus discovered ‘the real cause of the depression

and

poverty

continued

of the lower classes’. He tried ‘to put men

on their guard against poverty by making them bear the discipline of its consequences’. By explaining poverty in terms of a simple race between population and the means of subsistence the Malthusian population theory provided ‘the touchstone for all classical thinking about economic policy’.®* The Essay was meant ‘to turn the light of political economy upon the political philosophy of the day’. Bonar is firm in his view that ‘to Malthus the discovery of truth was less important than the improvement of society’. ‘When an economical truth could not be made the means of improvement, he seems to have Jost interest init’ s% Malthus’ ultimate triumph was in ‘identifying poverty with overpopulation so that to deny the latter was considered synonymous with denying the former’.*? Undue population growth among the lower classes was responsible for their poverty. He behoved the English labourers to be ashamed of their ‘broods of children’. The poor are the architects of their own destiny. The remedy for poverty lies in the hands of the poor themselves and in the hands of no one else: ‘....the knowledge and prudence of the poor themselves, are absolutely the only means by which any general improvement in their condition can be effected. They are really the arbiters of their own destiny; and what others can do for them, is like the dust of the balance compared with what they can do for

themselves. These truths are so important to the happiness of the great mass of society, that every opportunity should be taken of repeating them’’.%8 prgeted Sita +

Poverty in English Classical Political Economy

67

Malthus accepts poverty as a stimulus to the production of wealth and regards it as a natural phenomenon, not to be cured. But he qualifies his stand in the first edition of his Essay when he remarks in its second edition that extreme poverty or indigence past hope ceases to act as a spur to industry. This idea is emphasized in the following lines: ‘‘It is the hope of bettering our condition, and the fear of want rather than want itself, that is the best

stimulus

to

industry; and its most constant and best directed efforts will almost invariably be found among a class of people above the class of the wretchedly poor.’’®? Malthus’ avowed object was to vindicate his contemporary society from charges that poverty was due to institutions rather than to inherent natural causes. He had little hope of solving the problem of poverty, but he had hopes that his doctrine would solve the moral and political problem of apportioning blame for that poverty: ‘‘...it is evident that every man in the lower classes of society who became acquainted with these truths, would be disposed to bear the distresses in which he might be involved with more patience; would feel less discontent and irritation at the governmen and the higher classes of society, on account of his poverty... The mere knowledge of these truths, even if they did not operate sufficiently to produce any marked change in the prudential habits of the poor with regard to marriage, would still have a most beneficial effect on their conduct in a political light.’’*° By concentrating on population pressure as the cause of poverty and by holding the poor responsible for population pressure and the evils emanating from it, Malthus shifted the responsibility for the most urgent social and economic problems from the upper classes and from government to the poor themselves. This transfer of responsibility constitutes another break with the ideas of Smith, who had held the bad practices of government largely responsible for the various economic evils.*! ;

In the first and second editions of the Essay Malthus made the progress of the ‘‘labouring poor” in number and well-being depend predominantly on the food supply made available to the masses. But in its fifth edition he wrote, ‘‘A rapid increase of wealth indeed, whether it consists principally in additions to the means of subsis-

tence

or to the stock

of conveniences and

comforts, will always

ceteris paribus, have a favourable effect on the poor’. However, he added that it would have that effect only if ‘‘individual prudence”

were joined with ‘‘the skill and industry and produced wealth’’. He pointed out that the introduction of manufactures had enabled the poor ‘‘to give something in exchange for the provision of the great Lords instead of being dependent upon’ their bounty.’’4? The condition of the labouring classes depends, according to Malthus, ‘“‘partly upon the rate at which the resources of the

country

are

increasing, and partly upon the habits of the people’,

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Studies in Economic Analysis and Policy in Retrospect

“‘Both these causes are subject to change, and often change together.” ‘‘Still, however, habits are different with the same increase of resources; and an inferior mode of living is a cause as well as a consequence of poverty.’’ ‘‘It would be desirable, though difficult, to ascertain the principal causes of the different modes of subsistence which prevail among the poor of different countries.” ‘‘Whatever tends to depress the character of the poor, contributes to the first of these results; whatever tends to elevate them, to the second’’, ‘‘If the general demand for labour fail, particularly if the failure be sudden, the labouring classes will be wretched in the midst of cheapness; if the demand for labour be considerable, they will be comparatively rich in the midst of dearness.”’

The indicators of poverty and decline listed by Malthus in his Principles are ‘‘diminished capital’, ‘‘diminished population’, ‘‘a bad

system

of cultivation’,

and

‘‘the

low

market

price

of raw

produce.”’** Malthus replaced Smith’s amusements with ‘‘luxuries’’ while defining the ‘‘good state’’ of ‘tthe labouring classes” which he gave a

new

name,

considered “*strict

‘‘the

lower

classes’.

These

classes

cannot

be

to be ‘‘in a good state”’ unless they enjoy, in addition to

necessaries’

and

food,

‘‘some

conveniences

and

even

luxuries’. But food remains with him the most important determinant of their well-being for the ‘‘condition of the labouring classes must be the worst possible” if ‘‘the wages of labour estimated in food are low”. In his Essay** Malthus makes three generalisations of great general significance: One, what limits the numbers ofa people is not the possible but the actual food. Two, want destroys a population less often directly by starvation than indirectly through the medium of manners and customs. Three, the mere pressure of impending starvation does not lead to progress. Starvation is seldom

the immediate check; it is the ‘By nature man is a lotus-eater great actual population and poverty and dependence are desiderata’”” which should be

ultimate check. As Bonar has put it, till hunger makes him a Ulysses’. A

a state of society in which abject little known are ‘“‘the two grand united in a compatible manner.4®

Malthus feels provoked to address himself to the poor, ‘not

they are poor so much as because they are numerous’.*®

because

An increase in the relative number in the middle part of society and a decrease in the relative number in the inferior part of society are ‘‘most favourable to virtuous and industrious habits... to the growth of all kinds of talents”, to the improvement of the prospects of the lower classes and so the diffusion and animation of the desire to better one’s condition. A “permanent and_ general improvement in the condition of the poor’ is contingent on the generation of ‘‘prudential habits’ among the lower classes. It cannot be effected ‘‘without an increase in the preventive check.’’43 |

Poverty in English Classical Political Economy

69

The four pre-requisites for the growth of prudential habits stressed by Malthus are: security of property, legal equality to accord dignity to the lower classes, the spread of representative government, and improvements in education.

Malthus continually takes the stand that ‘‘security is a greater blessing than wealth itself, and insecurity a worse evil than poverty’’. Practice of ‘‘moral restraint” by the poor willimprove their condition by preventing them from sliding to the rock-bottom of mere

subsistence. To Malthus moral restraint meant essentially delayed marriage. Moral restraint might prevent population from tending to outrun the limits of subsistence. ‘But it was the essence of his argument that this check could only be expected to operate in a context of suitable institutions; and he held firmly the view that under systems of equality and common ownership the stimulus to moral restraint would be absent’.* Moral restraint is the remedy for poverty. Fear of want, rather than want, is the best stimulus. The threat of starva-

tion is essential to industry. In his letter to Samuel Whitbread, Malthus assumed that ‘‘the poor were deterred from very early and improvident marriages by the fear of dependent poverty than by the contemplation of positive distress”. By desiring betterment of their present conditions the lower classes could reduce their poverty. Like Adam Smith, Malthus saw man as being impelled by the desire to better his condition. Better knowledge, greater dignity, a feeling of personal responsibility and the fear of degradation induced man to live up to this impulse by following the commands of prudence. But whilst to Adam Smith ‘self-reliance’ was the clue to the solution of the economic problem, to Malthus it was ‘self-denial.’

Malthus states that the luxuries of the few rich harass the industry of the poor by varying with the fashion; but the luxuries of the poor, when embodied in their general standard ofliving, are not only the best kind of check to population but the steadiest encour-

agement to general trade.*° He calculates that high wages might stimulate rapid growth of population or bring about a decided improvement in the mode of living of the lower classes: “The wages of labour, on which the power of the lower classes of people to procure food depends, and according as the employment of the country is increasing, whether slowly or rapidly, these wages will be such, as either to check or encourage early marriages such as to enable a labourer to support

only two or three, or as many as five or six children.”*! It is the “‘average earnings of the families of the labouring classes throughout the year on which the encouragement to marriage, and the

power

of supporting

children, will depend and not merely the

wages of day-labour estimated in food.’’®

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Studies in Economic Analysis and Policy in Retrospect

The labouring classes should be enabled to ‘‘command a larger share of the necessaries and comforts of life’? by raising ‘‘the relative proportion between the price of labour and the price of provisions.” Malthus denied that the indigent had a natural right to relief. Redistribution of wealth and similar measures could not provide permanent relief. The poor should depend on their

own

‘‘exertions,

industry and foresight’’ and practise ‘‘more restraint’. The English poor laws by placing a premium on population created the poor which they maintained. Without them ‘‘the aggregate mass of happiness among the common people would have been

much greater.’’53 The whole drift of Malthus’ Essay was against the continuance of the poor laws, which were ‘‘the real cause of the continued depression and poverty of the lower classes of society’. Had these laws never existed, there ‘‘might have been a few more instances of very severe distress’? but ‘‘the aggregate mass of happiness among. the common people would have been much greater than it is at present”’. In his letter to Samuel Whitbread, Malthus asserted that he had not admitted a single proposition which appeared ‘‘to detract from the existing comforts and gratifications of the poor, without very strong grounds for believing that it would be more than compensated to them by the general and permanent improvement of their condition”. He felt that those who were anxious to extend the comforts and to elevate the condition of the lower classes of society would rationally express their apprehensions that the attempt to sanction by law a right which in the nature of things could not be adequately gratified might ‘‘terminate in disappointments, irritation, and aggravated poverty.”

Malthus raised the spectre of all of society being dragged down to the poverty level if attempts were made directly to raise the poor above it by executing income-transfer policies.*4 The distribution of material relief never seemed to Malthus a case where society could help the poor without in some degree injuring their independence and their strength of character. In the matter of charity he was clearly on the side of natural liberty and individualism.

Malthus objected to the construction of houses for the poor lest this might encourage them to marry.

Every effort to ameliorate the general lot of the poor which does. not tend to understock the market with labour is ‘‘perfectly futile and childish.’ The system should provide good opportunities for all able and ambitious, young poor men to rise by their own efforts in the economic and social scale.

Poverty in English Classical Political Economy

_

Malthus is at one with Smith in ‘general resistance to

1a:

legislative

interference’: “Bad as are the effects of the irremovable causes of poverty, interference makes them still worse.”

His plea for the abolition of the poor laws in order to spur

men

on to be self-dependent arises from ‘his projection of middle motives and fears into the minds and habits of the poor.’®$

class

In his letter to Samuel Whitbread, Malthus expounded that the task of banishing poverty from society was ‘‘clearly beyond the power of legislative regulation”, if not ‘‘absolutely impossible’’. The compulsory provision for the poor had threatened ‘‘the extinction of all honourable feeling and spirit among the lower ranks of society’. It degraded and depressed the condition of ‘‘a very large and most important part of the community”, which had purchased its right to a provision by law, by too great and extensive a sacrifice of its liberty and happiness. But Malthus favoured the total abolition of the poor laws not at once but by gradual steps. And he was not against all relief. He approved of interference with the system of natural liberty in certain respects. In his Essay he made certain concessions, such as free medical care for the poor in ‘‘disastrous accidents, unconnected with habits of indolence and improvidence’’, public assistance to emigrants and relief to the poor families with more than six children. Just as work-relief was permissible under exceptional conditions charity was also permissible during ‘‘unmerited calamities’’. He maintained that assisting our fellow-creatures in distress was our great moral duty. All

the

same,

he

was

dead

against

relief when claimed as a

right. He was fully aware that the risks of the English working man were greater than those of his Continental brethren. All he desired was to give the workman scope for the sense of personal responsibility out of which the poor laws were beguiling him. He knew quite well that no good end would be served by the removal of these laws unless the public had been educated out of the evil ways of it. He proposed, therefore, to make a gradual change, the essence of which was to be the disclaimer of any right on the part of a poor man to be supported at the public expense. Children have a right to be supported by their parents but not by the public. He prescribed that a law be passed declaring that no legitimate child born from any marriage taking place a year after its enactment would ever be entitled to the parish relief. It is reported that ‘‘if Chandwick and Senior were its architects, the spirit behind the Poor Law Amendment Act (1834) was that of Malthus’’.®’” This amended Act allowed the right to relief only to the indigent. It refused all relief in aid of wages to the merely poor and the able-bodied. It carried out the principle that dependent poverty was disgraceful and had to be made disagreeable. In these amendments it was influenced by Malthus’ approach. However, in retaining the right of the indigent to relief it rejected that approach.

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Studies in Economic Analysis and Policy in Retrospect

Malthus believed that the cure for social evils lay in the thorough enlightenment of the people, including their moral purification as well as their intellectual instruction. A suitable educational programme would acquaint the poor with the true cause of their poverty. He emphasized that ‘‘a knowledge of the chief cause of poverty by taking away the distress would leave government at best no excuse for tyranny”. He also shared the growing enthusiasm of all friends of the people for popular education and considered the Tory arguments against instructing the poorer classes to be ‘‘not only illiberal, but to the last degree feeble, if not really disingenuous’’. He wrote, ‘‘An instructed and well-informed people would be much less likely to be led away by inflammatory writings, and much better able to detect the false declamation of interested and ambitious demagogues than an ignorant people.” ‘In an attempt to better the condition of the labouring classes of society’, insists Malthus, ‘‘our object should be to raise this standard as high as possible by cultivating a spirit of independence, a decent pride, and a taste for cleanliness and comfort’. ‘‘The effect of a good government increasing the prudential habits and respectability of the lower classes of society has already been insisted on; but certainly this effect will always be incomplete without a good system of education, and indeed it may be said that no government can approach to perfection that does not provide for the instruction of the people. The benefits derived from education are among those which may be enjoyed without restriction of numbers; and, as it is in the power of government to confer these benefits, it is undoubtedly their duty to do it.’

Hazlitt and Cobbett accused Malthus

of ‘hard-hearted

attacks’

on the poor. His efforts to repeal the poor laws struck them as entirely reprehensible. His proposal to suspend their operation for the newly married aroused their derision. They asked: How could a poor man know that he could support a family? How could he estimate the spells of unemployment or the wages which awaited

him? They pointed to the Juxuries of the rich and thé weight taxes

on

of the

the poor as sufficient explanations of the wretched state of

the English masses.*® On the other hand, Malthus believed that he used his pen constantly for the good of the English poor. His Principles of Political Economy represented ‘‘a marked shift in theory and policy from the contents” of his Eassy on Population.© He wanted “the great mass of society’, i.e., the labouring classes to be well

paid: ‘It is most desirable that the labouring classes should be well paid, for a much more important reason than any that can relate ta wealth; namely, the happiness of the great mass of society.’’®

Malthus in the Principles took strong exception to ‘‘the cry of the master manufacturers and merchants for low wages to enable them to find a market for their exports’? and pronounced, ‘‘ifa country can only be rich by running a successful race for low

wages, I should be disposed to say at once, perish such riches.’’®

Poverty in English Classical Political Economy

73

In his evidence before the Emigration Commission (1827) he deposed that he considered the general conditions of the labouring classes the most important of all because these classes formed ‘‘the largest part of the nation.”

_ Bonar commends ‘displaced workmen’ and Ricardo in favour and in protest against

Malthus’ ‘keen sympathy for the sufferings of which ied him to fight a losing battle with Say of something like an embargo on inventions, a fancied over-production.’

IV. David Ricardo

; ‘The happiness of far the greatest part of every community”, i.e., the labouring classes, according to David Ricardo, is governed

by the wages they receive.® When did an English labourer

of Ricardo’s days consider his

wages below the natural rate? Ricardo’s reply is: ‘‘An English labouer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other

pitta than potatoes, and to live in no better Ca0L

habitation than a mud

Ricardo describes the effects of divergence between the two prices of labour,

market and

natural,

on

its economic condition

in the

following words: “It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in his power to command a_ greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.”

He continues, ‘“‘When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural price, and that the labourer will have the moderate comforts which the natural rate of wages will afford.”’ ‘‘In rich countries a labourer, by the sacrifice of avery small quantity only of his food, is able to provide liberally

for all his other wants.’’®” In a letter to Tower, Ricardo contended, ‘‘Great

evils, however,

result from the idea which the poor Jaws inculcate that the poor have a right to relief.’ Ricardo’s worry over the Poor Law reform was that of ‘a hardline Malthusian.’. In Parliament on March 25,1919 he declared that in England at that time ‘the two great evils were the tendency

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Studies in Economic Analysis and Policy in Retrospect

towards a redundant population, and the inadequacy of the wages to support the labouring classes.’ He forecast that redundancy of population would be enhanced ‘if parents felt assured that an asylum would be provided for their childrenin which they would be treated with humanity and tenderness.*° The poor laws might have a benevolent intention ‘‘to amend the condition of the poor’” but their effect is ‘‘to deteriorate the condition of both poor and rich.”’ ‘‘Instead of making the poor rich, they are calculated to make the rich poor.” Their operation encourages ‘‘early and improvident marriages” among the poor. They render ‘“‘moral restraint” superfluous and encourage “‘improvidence’’. ‘‘The principle of gravitation is not more certain than the tendency of such laws to change wealth and power into misery and weakness... until at last all classes should be infected with the plague of universal poverty”’. The ultimate object of reform should be the abolition of these laws ‘“‘with the most security’? and ‘‘with the least violence.”’ ‘‘Every friend to the poor must ardently wish for their abolition.’ But there is a snag: ‘‘Unfortunately, however, they have been so long. established,

and the habits

of the poor

have been so formed upon

their operation, that to eradicate them with safety from our political system, requires the most cautious and skilful management... to prevent the most overwhelming distress to those for whose benefit they are erroneously enacted, their abolition should be effected by the most gradual steps.”

Ricardo desired that the working classes should become more fastidious, more exacting, in their demand of life: ‘‘The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a super-abundant population. In those countries where the labouring classes have the fewest

wants,

and

are

contended

with the

cheapest food, the

people are exposed to the greatest vicissitudes and miseries.’’”° Ricardo thought that ‘‘the comforts and well-being of the poor’’ could not be ‘‘permanently secured without some regard on their

part of the legislature, to regulate the increase of their numbers, and to

render

less frequent

among

them

early

and _ improvident

marriages.”””! Ricardo like Malthus attributed much of the misery of England’s. working classes to two immutable natural phenomena, viz., the ‘‘niggardliness of nature’? and the ‘“‘passion between the sexes’’, combined with bad laws (e.g., the corn laws and the poor Jaws) which impeded efficiency and induced fecundity. Twenty-five years of prosperity accompanied by high wages: might so accustom workers to the comforts of life that they might behave prudently in order to preserve them: ‘*.. . the nature of the evil points out the remedy. By gradually contracting the sphere of

Poverty in English Classical Political Economy

75

the poor laws; by impressing on the poor the value of independence; by teaching them that they must look not to systematic or casual charity, but to their own exertions for support, that prudence and forethought are neither unnecessary, nor unprofitable virtues, we

shall by degrees approach a sounder and more healthful state.’’”? The remedies suggested by Ricardo for combating ‘‘the evils of want and famine” caused by population pressure against the means. of subsistence are different for different countries: ‘‘In those countries

where there

is abundance

of fertile land...

(where) the

evil proceeds from bad government, from the insecurity of property, and from a want of education in all ranks of the people, to be made happier they require only to be better governed and instructed. . .” In long-settled countries where the evils are experienced on account of a diminishing rate of the supply of raw produce the remedy will consist in ‘‘a diminished rate of increase in the population.” ‘“‘A reduction of people’ will be the ‘‘practicable’’? and ‘desirable’?

remedy in the

countries ‘‘a more rapid and efficacious means.’’”8

case of rich

countries; in that of poor

accumulation of capital’’ is “‘the only safe

Ricardo was pessimistic about the efficacy of universal education in remedying the lot of the poor, who were swayed more by emotion than by reason. In his copy of Malthus’ Principles he commented,

‘‘The

often and too classes.”

whole

clearly

of this

inculcated

is excellent and cannot be

on

the minds

too

of the labouring

There was another difference in the approaches of Malthus. and Ricardo tothe problem of poverty and the role of the state in its abolition. Bonar elucidates this as follows: ‘It would be neither: complementary nor true to ascribe the difference to the logic of sentiments; but it is true that the acute sensitiveness of Malthus to the evils of poverty kept constantly before him large classes of facts which Ricardo seemed willing to forget, ard the path that he took, though long ago obscured and forgotten, led him in some important points away from Jaissez-faire to doctrines of our own day,in which society acting through its Government is allowed an originative and not merely a regulative action in the matter of industry and wealth.’ ‘...the relation of society to its destitute poor isnot to Malthus, as to Ricardo, a question of taxation

and

could only

finance,

be solved

but a

problem

by aclear

of morals

and politics, which

view of the relation of the citizen

to the commonwealth.’4 In Ricardo’s opinion ‘‘the interest of the landlord is always opposed to the interest of every other class in the community.” The principle of the security of property is held sacred by him. Even the labourers whose prospects are so drab would find any disturbance of the present order a catastrophe: ‘‘...for the quantity of employment in the country must depend, not only on the

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Studies in Economic Analysis and Policy in Retrospect

quantity of capital, but upon its advantageous distribution, and, above all, on the conviction of each capitalist that he will be

allowed to enjoy unmolested the fruits of his capital, his skill, and his enterprise. To take from him the conviction is at once to annihilate half the productive industry of the country, and would be more fatal to the poor labourer than to the rich capitalist himself. This is so self-evident that men very Jittle advanced beyond the very lowest stations in the country cannot be ignorant of it.” He is emphatic that ‘‘there is no way of keeping profits up but by keeping wages down.” V.

The Ricardians: James Mill & John Ramsay McCulloch James Mill was a utilitarian. In general, classical economics and

utilitarianism constituted complementary and mutually reinforcing elements in the libera!—individualistic stream of thought and action. In his book Commerce Defended, written before Elements, Mill remarked; ‘‘A nation is poor or is rich according to the quantity of property which she annually creates, in proportion to the number of her people is great or is small.”

As a true utilitarian, Mill regarded the happiness of the labouring classes as the measuring-rod of the prosperity of a nation: “‘When the comforts of Jabouring classes have decayed, the prosperity of the

country

is at least

at a

stand, a point from which

declension is the consequence, natural and very difficult to be avoided.’’> H2 agreed with Malthus that the ‘‘inevitable consequences of poverty are misery and vice.’’”®

In a country like England where

the economy is predominantly

wage-based, rise and fall of wages will largely determine the economic lot of the great bulk of its people. Wages fluctuate when

capital and population grow at different rates. Mill observes, “‘If it were the natural tendency of capital to increase faster than population, there would be no difficulty in preserving a prosperous condition of the

people.

If, on

the

other

hand,

it were

the natural

tendency of population to increase faster than capital, the difficulty would be very great. There would be a perpetual tendency in wages to fall. The progressive fall of wages would produce a greater degree of poverty among the people attended with its inevitable

consequences,

sequent

misery

numerous

family

misery

increased, born,

and vice.

mortality a

certain

As poverty,

would

number

also

and its con-

increase.

Of a

only, from want of the

means of well-being, would be reared. By whatever proportion the population tended to increase faster than capital, such a proportion of these who were born would die; the ratio of increase in capital and population would then remain the same, and the fall of wages would proceed no farther.’ Population is prevented from increasing by either ‘‘poverty, or prudence or other causes.’’”8 Mill

thought

that

poverty

entailed

thus

was

a world-wide

phenomenon: ‘“‘In almost all countries, the condition of the great body of the people is poor and miserable.’’?? Mass poverty is a

Poverty in English Classical Political Economy

77

deterrent to saving: ‘‘A class of rich men, in the middle of a class of poor (reduced to necessaries), are not apt to save.’’8° The two important objects of securing to the great body of the people all the happiness which is capable of being derived from the matrimonial union and of presenting the evils which a too rapid increase of their numbers involves might be reconciled by the progress of legislation, the improvement of the education of the people, and the decay of superstition.

Mill joined poor.

But

he

heartily in Francis Place’s had

his

reservations

drive for schools for the

about

the inclinations of the

poor: ‘*The persons belonging to the second, or labouring class, are cringing and servile, where the frown of the rich man is terrible, and his little favours important; but when they are placed in circumstances which impart the feeling of independence, and give them opportunity for the cultivation of their minds, they are little attached by the signs of wealth. This, therefore, is a state of society in which the possession of great riches gives little command over the sentiments of others, and cannot constitute a powerful motive for saving.’’®? John Ramsay McCulloch took ‘a far more of the interrelationships between social classes fellow economists’:

hierarchical view than most ofhis

‘“‘The distinction of rich and poor, is not as some

shallow sophists would seem to suppose, artificial but real; it is as much a part of the order of Providence as the distinction of the sexes. It depends on the differences of the mental and physical powers and dispositions of different individuals, and of the different circumstances under which they happento be placed .. . (while) riches are evidence of superior good conduct in the majority of cases mlx A He notes that ‘‘the poor have, upon plain and practical questions

that touch same

their immediate

penetration,

and

the

interests, same

the same understanding, the

regard to consequences as those

who are rich. It is indeed acontradiction, and an absurdity to pretend, that if the labourers are capable of earning, by an ordinary degree of application, more than is sufficient to support them, they alone, of all the various classes of society, will spend the surplus in riot and debauchery. They have the same common sense, they are actuated by the same passions, feelings, and principles as other

men; and when such is the case, it is clear that they cannot generally be guilty of such inconsiderate conduct.’

Like Ricardo he favoured high and stable wages: ‘‘Whenever wages are high, and little subject to fluctuation, labourers are found to be active, intelligent and industrious.’’** ‘“‘The best interests of

society require

that the rate of wages

possible, that a taste for comforts and diffused

judices.””

and, if possible,

‘‘When

wages

obliged to economise,

should be elevated as high as enjoyments should be widely

interwoven with

are

considerably

national habits and pre-

reduced,

the poor are

or to submit to live on a smaller quantity of

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Studies in Economic Analysis and Policy in Retrospect

necessaries and conveniences... andthe danger is, that and scanty fare which has thus been in the first instance, them by necessity, should in time become congenial from This lowering of the opinions of the labouring class with the mode in which they should live, as perhaps the most all the evils that can befall them.’’®®

the coarse forced on habit... respect to serious of

He comments that ‘‘by improving the education of the poor, and showing them how closely their interests are ideniified with those of their employers, and with the preservation of tranquillity and good order’? something, perhaps, might be done ‘‘to strengthen the existing institutions of the country.”

He wrote, ‘‘By raising the intelligence of the poor, and enabling them the better to appreciate the worthlessness of the nostrums on which they are so often called to depend, and to estimate the more remote, as well as the immediate consequences of their actions, it could hardly fail to contribute materially to their advantage.’’*® He sincerely desired the conditions of the working classes to improve and was aware of the contribution that education could make in this direction

but was,

unlike Malthus,

at the same

time

conscious of the inherent danger to order and progress from their being educated: ‘‘Education is valuable and in various ways; but it is at all calculated to reconcile the labouring classes to their lot. . . workmen have less chance than formerly (other classes) of advancing themselves. .. can anything be more natural, than that instructed workmen, who are thus condemned as it were to perpetual helotism, to continued poverty and hard labour, should become discontended ... Something, perhaps, may be done to strengthen the existing institutions of the country, by improving the education of the poor, and showing them how closely their interests are identified with those of their employers and with the preservation of tranquillity and good order.’’®”

Elsewhere poor, as

well

he enunciates, ‘‘...it is most for the interest of the as of the other

classes, that

they should be well in-

formed. .. they should be tmpressed, from their earliest years, with a conviction of the important truth, that they are, in a great measure, the arbiters of their own fortune; that what others can do for

them is but little compared with

what they may do for themselves;

and that

liberal

the most

tolerant

and

government,

and the best

institutions, cannot shield them from poverty and degradation, without the exercise of a reasonable degree of forethought, frugality, and good conduct, on their part.’’®$ He speaks of mass of citizens”, that the right of it had powerfully

‘‘the plague of poverty secretly creeping on the when the average rate of profit falls.8° He held property was not accountable for poverty; instead contributed to the growth of wealth.

Poverty in English Classical Political Economy VI.

79

Nassau William Senior

In his introductory lecture on political economy of 1826 Nassau William Senior explained that the really important work confronting economists was to explain why some nations were rich, whilst others

were poor, and to investigate those institutions which were most favourable to the production and diffusion of wealth:*! ‘‘The state of syciety in which the productiveness of labour and the mode in which it is applied, secure to the labouring classes all the necessaries and some of the conveniences oflife, seems to be not merely conducive but essential both to their morals and their happiness .. .”’*? In his Report on the Condition of the Handloom Weavers Senior diagnosed the distress of the handloom weavers as caused by ‘‘a disproportion between the supply of handloom labour and the demand for it.” Whilst the supply was excessive, the demand was diminishing and irregular consequent upon the competition from the powerlooms. As aclass, the handloom weavers had been reduced to ‘‘the reserve of the industry for times of active trade.” Their economic lot could be bettered by steadying the demand for their services, lowering their cost of living, increasing their mobility, and improving the quality of some of the goods (like house-room) they bought: ‘‘The majority ...are labourers, working each for his employer, and relying for his weekly subsistence solely on his weekly wages... With almost all of them low wages produce immediate distress and want of employment immediate destitution. We do not believe that anyone who had not mixed with the working classes, we do not believe that we ourselves, can adequately estimate how much mental and bodily suffering, how much anxiety and

pain, how much dependency and disease, are implied in the vague terms, ‘a fall of wages’, or ‘a slack demand, for labour.’’% Senior was against the extension of the English Poor Law to Ireland where poverty was chronic, caused not only by unemployment but also by low wages and political unrest and the cure lay in raising the general He was not quite sure that national prosperity would inevitably result in the economic uplift of ‘‘the great class at the base of the whole”; ‘‘The intermediate Classes might become more numerous and powerful, and the means of enjoyable existence be more and more largely

diffused, while vet the great class at the base of the whole might increase in number only and not in comfort nor in cultivation.’’®® The workers would be said to act prudently if they limit their numbers for the sake of higher wages, for ‘‘in proportion as mankind rise above the condition of the beasts, population is restrained by the fear of want, rather than by want itself.”"°° ‘The causes of poverty”, insinuates Mill, ‘tare not so obvious at first sight to a population of hired labourers, as they are to one of proprietors, or as they would be to a socialist community.’’!°' To him poverty is ‘‘a factitious thing, produced by the tyranny and rapacity of

governments and of the rich.’’?® Mill stipulated that ‘‘no remedies for low wages have the smallest chance of being efficacious, which do not operate on and through the minds and habits of the people.’’ If they don’t, they might temporarily improve the condition of the very poor but with their numbers rising soon, their poverty would increase. ‘‘Poverty, like most social evils, exists because men follow their brute instincts

without

due consideration.”

the labouring

classes are

Mill finds that the great majority of

incapable of ‘‘taking any rational view of

their own aggregate condition...either from the uncultivated state of their intelligence, or from poverty, which leaving them neither the

fear of worse,

nor

the smallest

them careless of the consequences thought for the future.’’!°

hope of better, makes

of their actions, and

without

Mill says, ‘‘So long as the necessary relation between the numbers of the labouring population and their wages had escaped attention, the poverty, bordering on destitution, of the great mass of mankind being a universal fact was (by one of those natural

illusions from which human reason is still incompletely emancipated) conceived to be inevitable’ and “‘it is historically true that only from that time (the appearance of Mr. Malthus’ Essay on Population) has the economical condition of the lobouring classes been regarded by thoughtful men as susceptible of permanent improvement.”’-°*

Mill asks: Why should the higher and middle classes be called upon to make sacrifices for improving the condition of the existing

generation

of labourers

‘“‘merely

that

the country may contain a

greater number of people, in as great poverty and as great liability to destitution as now?’’ The true remedies lie in ‘‘restrictions on

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Studies in Economic Analysis and Policy in Retrospect

marriage, combined with such severe penalties on illegitimate births” since ‘‘without these provisions, the millennium promised would,in little more than a generation, sink the people of any country in Europe to one level of poverty.’’!”

He goes on, ‘‘The

National Assembly of France had been much

blamed for talking in a historical style about the rights of man, and neglecting to say anything about the duties. The same error is now in the course of being repeated with respect to the rights of poverty ...Itis most true that the rich have much to answer for in their conduct to the poor. But in the matter of their poverty, there is no way in which the rich could have helped them, but by inducing them to help themselves.’’%

For altering the habits of the labouring people there is need for ‘fa two-fold action’’, directed simultaneously upon ‘‘their intelligence and their poverty.” ‘‘An effective national education of the children of the labouring class is the first thing needful,” if its poverty is to be abolished. The second is a system of measures which will extinguish extreme poverty for one whole generation. By the time of Mill it was widely believed that government intervention in the economy on behalf of the poor was a real prospect. Mill

tween

was ‘a reluctant

‘his urge

to

interventionist.’

ameliorate

There was

tension

be-

the condition of the poor and his

distrust of state action.’!

Mill treated with disfavour the half-hearted relief measures: ‘‘When the object is to raise the permanent condition of a people, small means do not merely produce small effects, they produce no effect at all. Unless comfort can be made as habitual to a whole generation as indigence is now, nothing is accomplished; and feeble half-measures do but fritter away resources .. .”"1!°

Mill discusses the two conflicting theories popular during his time concerning what social position would be desirable for the \abouring classes. The one he calls ‘‘the theory of dependence and rrotection”; the other hecalls ‘‘the theory of self-dependence.” According to the first theory, the lot of the poor should be regulated forthem, not by them. It is the duty of the higher classes to think for them and to take the responsibility of their lot. The poor

should trust and rely on the rich. The relation between them should be only partly authoritative: “it should be amiable, moral and sentimental: affectionate tutelage on the one side, respectful and grateful deference on the other. The rich should be in /oco parentis to the poor, guiding and restraining them like children.”

But this isa mere idealization and not attainable in practice **because the poor have come out of the leading-strings, and cannot any longer be governed or treated like children. To their own

qualities must now be commended the care of their destiny.”

Poverty in English Classical Political Economy

83

The second theory believes in self-government, in treating the poor as equals. Mill entrusts the well-being of the labouring people to the care of their own destiny. Of the two conflicting theories regarding the social position of labourers, the one advocating selfdependence is worthy, while that which advocates dependence Bs the protection froma superior class is unworthy and untenable. Mill sharply questioned the adequacy of his society’s treatment of the poor. In his central chapter on this subject, ‘‘On the Probable Futurity of the Labouring Class,” Mill concluded, after an analysis of how the rich and the powerful acted, that the poor could not trust either the wisdom or the benevolence of their superiors. All the dreams of aristrocratic magnanimity which had endured even in Bentham’s early writings were just day-dreams— nothing more. And so upon their own exertions depended the fate of the poor.1”

On the whole, Mill was in favour of the collective interests of the poor being regulated by themselves, not for them by others. The minds of the poor should not unnecessarily be filled with false ‘feelings and doctrines”, otherwise ‘‘we may succeed in bursting society as under by a socialist revolution; but the poor, and their poverty, we shall leave worse than we found them’’.148 Mill was against bolstering up old customs, whereby ‘“‘limited classes of labouring people” obtained partial gains which interested them in keeping up the present organisation of society and in favour of introducing general practices beneficial to all. The “privileged classes” of skilled artisans must, for the improvement of their condition, resort to the same remedies as the ‘‘less fortunately circumstanced and comparatively helpless multitude”’.

Mill enjoined that, subject to certain conditions, the certainty of subsistence

rather

should be

than

held out

that relief to

by law to the destitute able-bodied

them

should

depend

on

voluntary

charity.114 Mill made

‘‘the

guarantee of support’ to the poor conditional

upon restrained freedom and curtailed indulgence: ‘‘. . . the guarantee of support could be freed from its injurious effects upon the minds and habits of the people, if the relief, though ample in respect to necessaries, was accompanied with condition, which they disliked, consisting of some restraints on their freedom and the

privation of some indulgence.”

Through profit-sharing the interests of the workers could made to run parallel to those of their masters.

be

Mill was a realistic judge of the English working man, capable of saying that ‘‘as soon as any idea of equality enters the mind of an uneducated English working man, his head is turned by it. When he ceases to be servile, he becomes insolent.’’!8

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Studies in Economic Analysis and Policy in Retrospect

In his speculation of the probable future of the labouring classes Mill insists that the emphasis must be placed upon a better distribution to that end so that labour shall receive a larger remuneration. According

to Mill,

‘‘the

best state

which, while no one is poor, no one

for human nature is that in

desires to be richer.”

Mill’s Principles of Political Economy had ‘a flavour very different from Ricardo’s book. It glowed with a temperate optimism concerning the future, because Mill saw that economic institutions are malleable.’!” Mill entertained the hope that ‘‘universal education” and ‘‘a due limitation of the number of the community’? would render even capitalism tolerable: ‘‘Education, habit, and the cultivation of the sentiments will make a common man dig or weave for his country as readily as fight for his country.” According to him, education is the best method to cultivate the minds of the working people—‘‘the sole remedy, if understood in its widest sense.’’118 ‘*An education directed to diffuse good sense among the people, with such knowledge as would qualify them to judge ofthe tendencies of their actions, would be certain, even without any direct inculcation, to raise up a public opinion by which intemperance and improvidence of every kind would be held discreditable, and the improvidence which overstocks the labour market

would

be

severely

condemned,

as

an offence against the

common weal.”}® According to Samuels, the role of education ‘as an instrument of

non-legal and non-deliberative social control’ was in Mill coupled with a vision that education could provide ‘the means whereby, future, if not present, generations of the common man could improve their intellectual, social, political and material status.’!°

Mill wanted efforts, such as a public education system, to be directed simultaneously to the workers’ intelligence and poverty.

But he did not mass

fail to record

education.

He

his note

considered

of dissent. on the utility of

a rising

better remedy: ‘‘Education is not compatible It is impossible

effectively

is difficult to make those

to teach

standard

of comfort a

with extreme poverty.

an indigent population.

feel the value

And it

of comfort who have never

enjoyed it, or those appreciate the wretchedness of a precarious. subsistence, who have been made reckless by always living from hand to mouth... improvement in the habits and requirements of the mass of unskilled day-labourers will be difficult and tardy, unless means can be contrived of raising the entire body to a state of tolerable comfort, and maintaining them in it until a new generation grows up.”’2?1

Although all the members of the classical school supported some form

of state

aid

to

education,

Mill,

like Senior, had ‘much less

confidence in the efficacy of consumer’s choice in educational matters’ than Smith and the two, therefore, recommended ‘an extension of state control over the school system.”!2"

Poverty in English Classical Political Economy

85

Mill on one occasion threw up his hands in despair at the difficulties of indoctrinating the lower orders of society in educational matters, viz., ‘‘the low state of their understandings”, their “infantile credulity” to the items of their brethren, ‘‘a deficiency in the power of reasoning and calculation which makes them insen-

sible to their own direct personal interests”, want of ‘‘the commonest

worldly wisdom”’, etc.1#8 Like Senior, Mill did not trust the average good sense of the parents, and obviously for similar reasons. Mill’s opinion was thus in striking contrast to Smith’s preference for private enterprise in the provision both of education and medicine. Whereas Mill thought that the competitive market principle broke down in education because the customer was not a competitive judge of his interests, Smith had argued that the competitive market principle had not been allowed to operate properly in the first place due to

the hindrance of endowment.1*4 VIII.

Concluding Remarks

English classical political economy covered a stretch of 150 years, during which conditions in Great Britain ‘changed from those of a mainly rural and mercantile community, governed chiefly by a Jand-owning aristocracy to those of a predominantly urban and manufacturing community, tending towards pure democracy.’!”* The classical economists were ‘not a clearly defined set of economists, but a certain small solid core shading off into a larger penumbra, which was an essential part of the over-all phenomena, since classical economics included fundamental ideas which did not originate with those who were classical economists in all respects’. More or less similar philosophies of life and similar judgements about social phenomena emanated from more or less similar conditions of life and society facing these economists.!*” They possessed the ability to provide solutions to the contemporaneous economic and social problems. They prescribed particular policies for social action. The stimulus to much of the abstract analysis noticeable in the classical theory sprang from the classical economists’ interest in the practical problems of their day, which conjoined to ‘the teleological and meliorative view of the social order a utilitarian philosophy’.

The classical economists were reformers and ‘the theory of economic policy in English classical political economy was theory of economic and social reform’. It was derived, in part at least, from a systematic enquiry into the nature of economic relationships and their mode of development in different types of circumstances, i.e., ‘a more or less comprehensive analysis of the economic system as a whole.’ The classical economists were critics of some contemporary institutions and some contemporary habits, and they had definite proposals for what they deemed to be improvement, which they advocated with more or less energy.*8

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Studies in Economic Analysis and Policy in Retrospect

Robbins takes the line that when the classical thought is viewed as a system of prescription, the chief aim appears to be the improvement of the condition of the people, especially the labouring classes, via a rise in the long-run, equilibrium level of wages. The classicists fully appreciated the intimate interdependence of economic and social considerations in matters l'ke poor law and factory legislation. They analysed the question of poverty and expressed their opinions on it, although their individual attitudes towards this problem underwent significant modifications as their knowledge of the facts grew.

The individual classical economists substantially modified and even reversed their initial opinions on policy questions whenever the special circumstances of the case warranted an exception to the general rule, for which they have been accused of ambivalence. Likewise, although they shared ‘a common, general theoretical and philosophical position’, yet they disagreed sharply on ‘particular

policy issues’. their part.??°

This

led toa

rich variety

of economic

opinion on

They were deeply concerned about individual freedom and happiness. But as economists.they dealt with ‘men in the aggregate— with states, not with families; with passions and propensities, not

with those which occasionally influence the individual.’!%° Their laissez-faire is not to be equated with ‘an essentially negative conception of the economic and social role of government.” Since the government of their time was ‘partisan, corrupt or inefficient’ they wanted minimum necessary state intervention through maintenance of law and order, as also through a variety of ‘nonlegal social controls’ which appeared indispensable to the working of a ‘commercial society’, for this, they thought, might guarantee individual freedom in all walks of life. They were of the opinion that ‘men were better able to perceive their true interest in the market-place, where gains.and losses were easier to calculate, than in social affairs, where the consequences of alternative courses of action were less readily discernible.’1%* Underlying their reliance on the prudential check upon population growth was ‘the classical economists’ dedication to the principle of individual freedom, their firm belief in the labourer’s capacity for self-improvement without the intervention of any external agency— whether autocratic, paternalistic, or philanthropic, and their conviction

that

co-operation

between

the

various

social classes and

ranks was both possible and desirable.’ The future of the labouring classes, and of society in general depended on ‘a kind of co-partnership between the well-to-do and the poor, in which the former provided an appropriate framework of laws and a rate of savings and capital accumulation sufficient to ensure a high demand for labour, and the latter— being the more numerous class—exercised a proper degree of restraint over the growth of numbers’.

Poverty in English Classical Political Economy

87

The classical economists’ conception of the labourer’s predicament and prospects was based ona theory of human nature and motivation that can broadly be termed utilitarian. They supposed that all men were fundamentally alike in respect of their native characteristics and potentialities and in their capacities for happiness. But they also believed that environment exerted a profound influence on men’s habits and customs. On the one hand, they regretted the reckless, idle and improvident conduct of the lower orders of the people; onthe other, they were optimistic about the qualities of self-reliance, thrift, prudence, industriousness desire for self-improvement, etc., latent in them as in the higher orders. They argued that any attempt to improve the economic welfare of the lower-income groups in society would be frustrated by an increase in the size of the population. While humanitarian feelings might call for social measures to raise the income of the labouring poor, sound economic thinking argued that nothing should be done.**? This constituted one of their faults, as pointed out by Marshall: ‘The bent of mind of Ricardo and his followers caused them to speak of labour asa commodity without staying to throw themSelves into the point of view of the workman and without dwelling upon the allowances to be made for his human passions, his instincts and habits, his sympathies and antipathies, his class jealousies and class adhesiveness, his want of knowledge and of the opportunities for free and vigorous action’. They, therefore, ‘attributed to the forces of supply and demand a much more mechanical and regular action than is to be found in real life; and they laid down laws with regard to profits and wages that did not really hold even for England in their own time.’!%% But their ‘most vital fault’, according to Marshall, was that ‘they did not see how liable to change are the habits and institutions of industry. In particular they did not see that the poverty ofthe poor is the chief cause of that weakness and inefficiency which are the causes of their poverty’. They had not the faith that modern economists have in the possibility of a vast and lasting improvement in the condition of the working classes.1*4 However, they reposed great faith in the value of education ‘as a means of persuading men to recognise and act upon their true interest.’ ‘They believed it would not only raise the productivity of

labour, by increasing the workers’ efficiency and adaptability, and by inculcating habits of attention, obedience, and self-denial; but also that it would significantly enhance the prospects for social reform. Their attack on paternalism stemmed partly from their faith in the educability of man; and their whole approach to

economic and

social

policy was coloured

by their persistent habit

of underestimating the difficulties of persuading the labourers to adopt bourgeois habits and standard’. They were convinced that vertical social mobility was both possible and desirable.1*°

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Studies in Economic Analysis and Policy in Retrospect

They did not spare in their attack the dominant

social classes of

their day, e.g., landed aristocrats, rising capitalists, statesmen and politicians, merchants and manufacturers, etc., for their ‘mean rapacity’, ‘monopolising spirit’, ‘propensity to deceive and oppress the public’, their ‘insidious and crafty nature’, and so on, which

caused the poverty of the many.!*6 This was because nearly all the founders of modern economics were ‘men of gentle and sympathetic temper, touched with the enthusiasm of humanity. They cared little for wealth for themselves; they cared much for its wide diffusion among the masses of the people. They opposed anti-social monopolies however powerful. In their several generations they supported the movement against the class legislation which denied to trade unions privileges that were open to associations of employers; or they worked for a remedy against the poison which the old Poor Law was instilling into the hearts and homes of the agricultural and other labourers; or they supported the factory acts, in spite of the strenuous opposition of some politicians and employers who claimed to speak in their name. They were without exception devoted to the doctrine that the well-being of the whole people should be the ultimate goal of all private efforts and all public policy. But they were strong in courage and caution; they appeared cold, because they would not assume the responsibility of advocating rapid advances on untried paths, for the safety of which the only guarantees offered were the confident hopes of men whose imaginations were eager, but not steadied by knowledge, nor disciplined by hard thought.’!37

References 1.

A. Toynbee, Century, Economic

tN

Lectures

London,

on

the Industrial

Revolution

1920, p. 73 and K.W. Kapp

Thought, New

&

of

L.L.

the

Eighteenth

Kapp, History

of

York, 1949. p. 65.

7 Baldwin, Thoughts on the Study of Political Economy, 1809, New

York,

968, p. 37.

3. 4. 5. 6. 7.

L.H. Haney, History of Economic Thought, New York, 1953, pp. 258-271. R. Lekachman, A History of Economic Ideas, Delhi, 19 17, pp. 140-141. wwidh J.A. Schumpeter, History of Economic Analysis, London, 1954, pp. 273-274. A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (abbreviated as Wealth of Nations hereafter) (ed. by E. Cannan), pp. Iviii, 33. 8. ibid. p. 30. DS

10. 11. 12. 13. 14. 15.

tbidsp. 122)

ibid, pp. 823-824. S. Hollander, The Economics of Adam Smith, Toronto, 1973, pp. 131-139. A Smith, op. cit., p. 249. : ibid, pp. 78-79. ibid, pp. 73-74. ibid, pp. vii, 43.

Poverty in English Classical Political Economy

89

16. ibid, p. 314. Ale ibid, p. 73. 18. R.L_ Heilbroner, ‘‘The Paradox of Progress: Decline and Decay in Wealth of Nations” in A.S. Skinner and T. Wilson (eds.), Essays on Adam Smith, Oxford, 1975, pp. 536-537. 19. A. Smith, op. cit., pp.68-69. 20. ibid. VAL A Smith, op. cit., BK 1, Ch 8. 22 ibid, pp. 66-67. 23. ibid, p. 143. 24. ibid, pp. 67-68. 2S). S. Hollander, op. cit., p. 245. 26. A Smith, Theory of Moral Sentiments, ed. by D.D. Raphel & A. L.

QT 28. 29: 30. Sil, B32.

Macfie, Oxford, 1975, p. 50. ibid, pp. 1-10. A. Smith, Lectures, ed. by E. Cannan. A. Smith, Wealth of Nations, p. 207. ibid, p. 130. L.H. Haney, op. cit., pp. 258-259.

H.L. Beales, ‘‘The Historical Context of the Essay Glass (ed.) Introduction to Malthus, London, 1953, 33 F.A Neff, Economic Doctrines, New York, 1950, p. 34. A. Toynbee, op. cit., p. 65. 35; M. Blaug, Economic Theory in Retrospect, London,

on Population” p. 10. 145.

in D.V.

1962, p. 68.

36. J. Bonar, Maltnus and his Work, London, 1924, pp. 5, 213. 37. T. Sowell, Classical Economics Reconsidered, New Jersey, 1974, pp. 94-95. 38. T.R. Malthus, Principles of Political Economy (abbreviated as Principles hereafter) (ed. by M. Paglin), p. 262. 32. TR. Malthus, An Essay on the Principle of Population, (abbreviated as Essay hereafter), J. M. Dent & Sons, London, 1961, pp. 474-475. . ibid, pp. 591-592. . H.W.

Spiegel,

The

Growth

of Economic

Thought, New

Jersey, 1971, pp.

276-277. . T.R. Malthus, Essay, pp. 293-294. . T.R. Malthus, Principles, pp. 161, 228, 436-7. . T.R. Malthus, Essay, pp. 25, 39, 43.

. ibid, p. 460. . K. Smith, The Malthusian Controversy, London, 1951. . T.R. Malthus, Essay, pp. 34-36. . L. Robbins, The Theory of Economic Policy in English Classical Political Economy, London, 1953, p. 125. . H.W. Spiegel, op. cit,, p. 276. . T.R. Malthus, Essay, p. 473.

. T.R. Malthus, Principles, pp. 228, 471. . T.R. Malthus, p. 427. . ibid, p. 344. ale Sowell, cp Cif Do ols . T.R. Malthus, Principles, p. 262.

. K. Smith, op. cit. 252s « H.L. Beales, op. cit., p. 15.

. T.R. Malthus, Essay, pp. 440-441.

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Studies in Economic Analysis and Policy in Retrospe ct

59. R. Lekachman, op. cit., p. 134.

60. J. Bonar, op. cit., p. 57. 61.

T.R. Malthus, Principles, p. 405.

62. ibid, p. 184. 63. 64.

L. Robbins, op. cit., p. 70 (quoted). J. Bonar, op. cit., p. 57.

65. D. Ricardo, On the Principles of Political Economy (abbreviated as Principles hereafter) ed. by P. Sraffa & Cambridge, 1970, p. 105.

66. ibld, p. 97. 67. ibid, p. 94. 68. P. Sraffa & M.H. Dobb (eds.), The Works Vol. VII, p. 248. 69.

B. Gordon, Political Economy pp. 20-21. 70. D. Ricardo, Principles, p. 54.

of Davia

in Parliament,

And Taxation M.H. Dobb,

Ricardo,

1819-1823,

Cambridge,

London,

1976,

71. ibid., pp. 58-59.

72. ibid., p. 107. 73. ibid., pp. 99-100. 74. J. Bonar, op. cit., p. 302. 75. J. Mill, Commerce Defended, A.M. Kelley Bookseller, New York, 1965.

76. J. Mill, Elements of Political Economy, (abbreviated

as Elements hereafter)

New York, 1963, pp. 28-29.

77. 78. 79. 80. 81. 82.

J. Mill, Elements, p. 52. ibid. ibid. ibid. ibid., pp. 54-55. A.W. Coats, ‘*The Classical Economists and the Labourer’ in A.W. Coats a The Classical Economists and Economic Policy, London, 197 (quoted).

83. ibid. 84. J. R. McCulloch, The Principles of Political Economy Principles hereafter), Edinburgh, 1843, pp. 192, 394. 85.

86. 87. 88. 89. 90. 91.

(abbreviated

as.

ibid, pp. 394-395.

ibid. ibid. ibid. ibid, p. 104. ibid, p. 87. eee p. 3

Nassau

Senior

and

Classical

Economics,

London,

1973,

92. N.W. Senior, Introductory Lecture on Political Economy, 1826, pp. 13-14. 93. M. Bowley, op. cit., pp. 246-250.

94. 95. 96. 97. 98. 99.

ibid. ibid., p. 277 (quoted). ibid., p. 269. ibid. ibid. J.S. Mill, Principles of Political Economy (abbreviated hereafter), People’s edition, London, 1888, Ch. 1 Sec. 2.

as

Principles

Poverty in English Calssical Political Economy

9}

100. ibid., p. 98. 101. ibid., p. 229. 102. J.S. Mill, **‘The Claims of Labour’’ (1845) reprinted in Essays on Economics

103. 104. 105. 106. 107. 108 109. 110. 1 iki2s 113. 114. 115. 116. iI

and Society: Collected Works of J.S. Mill, Toronto, p. 365.

Vol.

I, ed.

by

J.M.

Robson,

ibid., pp. 225-226, 230. ibid., pp. 364-365.

ibid., p. 375. ibid., pp. 325-326. J.S. Mill, Principles, pp. 230-231.

T. Sowell, op. cit., p. 23. R. Lekachman, op. cit. pp. 195-196. J.S. Mill, Principles, p. 232.

ibid., pp. 455-456. ibid., p. 757. J.S. Mill, ‘‘The Claims of Labour’’ (1845), op. cit., p. 376. J.S. Mill, Principles, 585

ibid., pp. 365-366. ibid., p. 110. W.C. Mitchell, ‘‘The

Prospects

of Economics”

The Trend of Economics, New York, 1930.

in R.G.

Tugwell

(ed).

York,

1966,

‘

118. J.S. Mill, ‘‘The Claims of Labour’’, op. cit., p. 326. i193 J.S. Mill, Principles, p. 230. 120. W.J. Samuels, The Classical Theory of Economic Policy,

New

pp. 69-67. 121% J.S. Mill, Principles, pp. 230-231. 1225 A.W. Coats (ed.), The Classical Economists and Economic Policy, London, 1971, ‘‘Introduction’’. 123. A.W. Coats, ‘‘The Classical Economists and the Labourer’? in A.W. Coats (ed.), op. cit. (quoted).

124. E.G. West, ‘‘Private versus Public Education, A Classical Dispute’ in A.W. Coats (ed.), op. cit. 125; L. Robbins, op. cit., p. 170. 126. T.. Sowell, op. cit:, p. 7. 127. A.W. Coats (ed.), op. cit., ‘‘Introduction’’. 128. L. Robbins, op. cit., pp. 169-172. 129. H. Landreth, History of Economic Theory, Boston, 1977, p. 8. 130. A.W. Coats, ‘‘The Classical Economists and the Labourer’? in A.W. Coats 131. 1527 133: 134. 135% 136. 13i72

(ed.), op. cit. A.W. Coats (ed.), op. cit., ‘‘Introduction’’. H. Landreth, op. cit., pp. 75-76.

A. Marshall, Principles of Economics, pp. 762-763. ibid. A.W. Coats (ed.) op. cit., ‘‘Introduction’’. T. Sowell, op. cit. pp. 14-17. A. Marshall, op. cit., pp. 47-48.

CHAPTER

SIX

Classical Factor Classification

(in retrospect) It is contended by the historians of economic thought that, on the whole, the classical theory of distribution was expounded in terms of the triad of incomes, which roughly approximated to the triad of factors formulated by its exponents. Other schemata (onefactor, two-factor, and four-factor) also were in vogue side by side. The triad doctrine took time to become firmly established as an organic part of classical political economy. ‘Enterprise’ or ‘organization’ was either not recognized or not assigned a rank co-ordinate or equal with the factors in the triad, and hence profit and interest were lumped together. Secondly, there is no unanimity among the historians of economic thought as to whether or not the classical economists were successful in carefully emphasizing the distinctiveness of each factor of production as well as its distributive share. Thirdly, there were distinguishable variations in the individual approaches to these questions. Lastly, the classical triad had its bitter critics, no doubt, but it had also a remarkably enduring following not only during the classical period but also during the marginal period, and beyond. It has its champions even among modern economists.

This chapter is a modest attempt to go into these various aspects of the problem in hand and to arrive at some definite conclusions. It is divided into five sections. In the first section we. examine the classical triad doctrine and refer to the views of the different classicists. In the second section we discuss the definitions of the

factors constituting the triad and of their rewards as presented in classical economics and also bring out the distinctions that we come across in the individual formulations. In the third section we take stock of the three notable departures from the classical triad idea which we notice in classical economics. In the fourth section we consider the merits and demerits of the triad concept. In the fifth and last section we set forth the broad conclusions to which our study leads us.

I The classical theory of distribution of national income as rent, ‘wages and profit was expounded in terms of the conception of the three factors (‘requisites’ or ‘instruments’) of production, viz., land,

Classical Factor Classification in Retrospect

oh

labour and capital, which concurred in its formation. One of its distinguishing features was that it was linked with the conception of the contemporaneous economy as composed of the three major social

classes,

viz.,

landowners,

labourers

and

capitalists.

Its

exponents tended to think of income distribution in terms of a corresponding division of the total population. In the second half of the nineteenth century production was ascribed to the co-operation (‘concurrence’ or ‘joint use’) of the three ‘great’ agents. The three-fold classification of income corresponded very well to the productive organization of the time and the place and seemed to fit the national classification of persons quite statisfactorily. In the economy the landlords (who were the owners of the ‘natural objects’), the labourers and the capitalists (the majority of whom were farmers) were ‘well-defined classes.”2 Costs to the producers were distributive shares met out of the value of the products sold to the recipients. Rent, wages and profit belonged generally to different persons and could be easily recognized.* Unquestionably, the classical economists never intended anything else to be included in rent, wages and profit except the true income.4

The classicists treated the three social classes representing the three factors of production as ‘simple sets of individuals that displayed some common character’.® In their age the landlords and the wage-earners were much more ‘homogeneous’ classes than they were noticed to be at the end of the first quarter of the present century. The prosperity of the wage-earners obviously turned on wages per head and that of the landlords equally obviously on rent per acre. By comparison, the profit-makers were as a class certainly much less homogeneous than either the landlords or the labourers.® The nations, as defined by the classicals,

were

divisible

into

those

three broad social classes and in the classical political economy the notion of class occupied a prominent place.’ The social environment (that is, the class composition or structure of society) in it was not anonymous. It viewed society as a stratification of particular social groups conforming to certain functions in the economic

process.®

It was

written in the background of the existing social

organisation®. In it the social classes coincided, more

or

less,

with

the economic or functional classes. The social classes constituted the basis for economic functions and interests. The three functional classes treated by the classicals roughly approximated the three social classes or groups known to them from their common experience. Each class (and each individual) was recognizable by an economic trait. A ‘triad of incomes’ emerged to correspond to the ‘triad of factors.’!® The three distributive classes of classical political economy were ‘no mere abstractions’. They were on all fours with the three social classes as they existed in reality. The three-fold division of society was regarded as something ‘actual and fundamental.) Prior to the classicals the physiocrats had looked upon society as comprised ‘of three classes, namely, the productive class of agriculturists; the proprietary (rentier) class including the king and the landlords; and the sterile class consisting of merchants,

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Studies in Economic Analysis and Policy in Retrospect

manufacturers, etc.

Turgot,

domestic for

servants,

example,

had

members

of legal

profession,

subscribed to the idea of the triad

of agents as well as returns in its ‘fullest and deepest meaning.’ the of

But, according to Schumpeter?’, although the consensus during classical period was in favour of the ‘fundamental triad’ factors,

yet,

in truth,

one-factor

and

two-factor

schemata

did prevail side by side with the three-factor scheme, and there were ‘verbal concessions’ by one group of authors to another during this period. Besides, there were a few isolated suggestions of the triad in the writings of this period. The triad doctrine had a slow and chequered evolution. It ‘‘did not fall down from heaven as an inspired revelation but was solved from circumstances with no claim to universality.’’!* In other words, it took time to become assimilated

into English classical economics. It did not become ‘an integral part of English political economy very early.’!4 The aversion or antagonism to the triad scheme due to philosophical or political or emotional causes gave way eventually and asserted itself merely in what Schumpeter labels as ‘verbal concessions.”!® Moreover, not all classical economists were adherents of the triad idea in their

writings, and even in 1848 it had not been firmly established.1® The later generation of classical economists was particularly helpful in the ‘anchorage’ of the triad doctrine in English economics. It became usual for systematic treatises on general theory to give the classification of requisites into land, labour and capital the most

prominent

place in their relevant

sections.

The

triad

doctrine

became so well-entrenched a cult that the later classicists seemed “‘to be struggling without decisive success to emancipate themselves from the thrall of the traditional three requisites or agents of production.”’”

Broadly speaking, another striking feature of the classical factor classification was that the classicists failed to recognize the entrepreneur as an independent claimant to a share in the distribution of income, occupying a co-ordinate and equal rank with the landlord, the Jabourer and the capitalist. They instead assumed that the owner of capital and the organizer of a business enterprise were one and

the

same

individual.

They

believed that the business process

ran substantially by itself, provided an adequate supply of capital was there. No distinction was made by them between profit and interest. Both were treated together. Profit was clearly

a

composite

entity; it meant the whole income derived from the possession of property other than land, Let us now substantiate the remarks made by us in the preceding passages economists.

with

examples

from

the

works

of

the

classical

Smith’s Wealth of Nations conceived of society as consisting of three ‘differentiated’ economic or functional groups, differentiated

by the sources of their income. The return which each group received for its services was not a matter of equity or justice but of

Classical Factor Classification in Retrospect

95

natural law. To Smith, the society was essentially ‘a living organism.”'® The first view of the triad held by him is apparently to be found in his division of the price of a commodity into its three component parts, which were, again, the sources of revenue to the three factors. By ‘a mere accident’? Smith was led to convert the theory of prices into a classification of income.!® This ‘indirect’ origin of the triad (that is, each source of revenue must be considered a factor of production) leads certain authors (such as Gide and Rist*°) to infer that the triad is not present in his work. But the fact of the matter in the words of Cannan is that in the Wealth it plays ‘‘a great part, being used firstly for the explanation of prices and secondly, apparently as an after-thought, for the explanation of Distribution”. The triad of incomes was discussed by Smith not because they were shares in distribution but because they were the ‘component parts of price.”*! He made the reservation that the income of any given person might be derived from two or even three sources. To quote, ‘‘When those three different sorts of revenue belong to different persons, they are readily distinguished,

but when they belong to the same, they are sometimes confounded with one another, at least in common language.’’ He declared all income to be originally derived from labour, stock and land but he did not care to build a theory of production on the basis of the classification he made of the sources of income.”? In consequence, we have a hiatus in Smith’s work, as Cannan puts it: ‘‘The proposition that the total produce or income of a naticn’s labour is ‘distributed’ into wages, profit and rent, is of course not exactly identical with the proposition that total wages, profit and rent

together make up the produce, since in the absence of a statement to the contrary, a part of wages, profit and rest might be outside of the produce.’’%8 Say, who was under great debt to Turgot,** Smith for attributing to labour alone the power Say was the first to operate unequivocally with the of factors on one and the same footing in both his

distribution

theories.

His

Traite

contained

found fault with to create value. trinity of services production and

the

doctrinal climax’, i.e., that the entrepreneurial process

‘outstanding

decided

and

apportioned the distribution of the aggregate income of society, and ‘that

the total

social

product

was

accounted

for and distributed

under three categories. To Say, it was human industry in conjunction with nature and capital which created value. All the three requisites were ‘indispensable for the creation of products’. His three-fold division of the factors became ‘the standard in nineteenth century economic literature.’*> It was Say who first said that the revenue of the community was produced by land, labour and capital and who first proceeded to arrange the theory of production under three headings: land, labour and capital.?* In Chapter Five of his book he

imputed production to the joint effort of the three requisites. Both land and capital were elevated by him into agents of production co-ordinate

with

labour.

Moreover, the agents of production were

distinguished by him from their services and the latter (and not the

96

Studies in Economic Analysis and Policy in Retrospect

former) were considered to be the objects of exchange or valuation.*” Smith’s ‘rough’ tripartite division of income ably elaborated by Say was adopted by the early nineteenth century economists ‘‘almost as a matter of course”’ without their trying to come to grips with the central problem and without dispute and in utter ignorance of the necessity of having ‘‘an opinion on the subject.’’-®§ Although the triad was scarcely present in the mind of Ricardo when in the first words of his Preface he spoke of ‘‘the produce of the earth—all that is derived from its surface by the united application of labour, machinery and capital’, yet in the text of the Principles he did speak of the three classes of the community which shared the produce of the earth: (1) the proprietors of the land, (2) the owners. of the stock or capital necessary for its cultivation, and (3) the labourers by whose industry it was cultivated. He treated a farm as a sort of industry and supposed that the division of the whole produce could be easily inferred as if from the distribution on a farm. His proprietor of land took no part in production. His owner of capital was represented by the farmer who was ‘the owner of the stock or capital necessary for the cultivation of land’. In St. Lewinski’s words, ‘‘In investigating the laws of distribution he looks at the economic phenomena from the windows of his estate in Gloucestershire (Gatcomb Park), seeing only the three classes

which figure in agricultural production. Here is the field of his observations relating to the theory of production. Only after having taken this into account may we understand his theories concerning rent, profit and wages’. His owner of capital was represented neither by the banker of the City nor the manufacturer but by the farmer, who was also ‘‘the owner of the stock or capital necessary for the cultivation of land.’’*®

Although Malthus made no direct use of the triad of agents®® and although he placed no emphasis on it, yet his theoretical set-up implied it definitely.** Both he and Ricardo were ‘‘too unsystematic and too much interested in passing controversy to put forward any coherent theory of production.” Senior classified the members of society into Roo REe capitalists. and proprietors of natural agents (i.e., land). He used four terms in , relation to each class, viz., the instrument, the class, the act and the

share.

‘Abstinence’

concurrence

was

of which

introduced

was

essential

by him

as

that

factor,

the

to the existence of capital. It

stood in relation to profit as labour did to wages. Senior formulated the conception of ‘landlord’ more precisely than any other economist preceding him. Schumpeter is of the opinion that the triad doctrine assumed ‘an original form’ in his works.*8

(J. S.) Mill adopted the triad doctrine substantially, though hesitatingly and without self-analysis.*! He at first mentioned only two requisites of production, namely, land and labour which he called ‘appropriate natural objects’. This was ‘a felicitous term’ that’

disarmed

unintelligent

criticism’

by avoiding

any suggestion that.

Classical Factor Classification (in Retrospect)

97

‘agents’ might be morally entitled to ‘rewards’.2® But subsequently Mill enlarged his list by adding to it capital, which he defined as ‘previously accumulated stock of the products of labour’. He defined ‘appropriate natural objects’ as those objects which ‘exist or grow up spontaneously, of a kind suited to the supply of human wants’. He seemed to be sceptical of the rigid class conception of his predecessors. ‘*There are only one or two communities in which the complete separation of these classes is the general rule. England and Scotland, with parts of Belgium and Holland, are almost the only countries in the world, where the land, capital and labour

employed in agriculture are generally the property of separate owners.’ None-the-less, he spoiled all chance of dealing ‘intelligently’ with the problem of production on account of his ‘strange belief’ that the laws of production were independent of human institution.

According to Schumpeter, Launderdale was ‘probably’ the first ‘major’ British economist to set up capital as a distinct factor.*® Writing one year after Say’s work, he established the trinity of factors as ‘sources of wealth’. This was in Spiegel’s judgement ‘a

multiple discovery.’8” McCulloch (a ‘minor light of the Ricardian period’®*) is ‘a notable exception’ to the rule since he made no use of the triad idea. Both Torrens (whom Cannan calls ‘magniloquent’**®) and James Mill (another ‘minor light’ of that period) used the idea. The former taught it very clearly, although he did not divide his exposition of production into chapters designated as Jand, labour and capital.4° He was not opposed to regarding capital as ‘accumulated labour." Alongwith the latter and Read he was helpful in the final ‘anchorage’ of the triad concept in English economics. ‘‘From this time forward’’, observes Cannan, ‘it became usual fcr systematic treaties on general theory to represent Production as a great department of the subject, and to give the classification of requisites... the most prominent place in that department.’’*?

II On the one hand, it is maintained by some _ historians of economic thought (see, for example, Haney**) that the classicists not only clung to the tripartite division of the factorsof production

but also stressed the distinctiveness of each factor as well as its reward. Onthe other hand, it is insinuated by others (see, for example, st—Lewinski"? and Cannan***)” that ‘the? Jack >of exactness in the classical terminology had its deplorable effects on the thecries of production and distribution and the use of the same term in them for quite different phenomena stunted the development of these theories and diverted them on to a wrong track. The want of ‘sound literary education and knowledge’ on the part of many of the best classicists, contends Cannan, prevented them from appreciating the fact that ‘““when a word is commonly used to indicate

one thing, it is always either futile or mischievous to define it arbitrarily as something else.”’4° Let us now amplify these views.

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Studies in Economic Analysis and Policy in Retrospect

The early classicals usually divided resources into two principal groups, viz., land and labour. They regarded land as a passive and non-augmentable (i.e., non-producible or constant) and _ specific factor capable of producing corn or wage goods only. They regarded labour as an active and augmentable (i.e., producible or variable) and versatile factor capable of producing necessities of life as well as luxuries (like direct personal services).4° This classical approach to factor classification has its exponents among the modern economists too, such as Kaldort? and Knight,‘8 who agree with this classical distinction.

Ancther classical approach to factor classification was

to regard

some factors as ‘primary’ or ‘original’ or ‘absolutely indispensable’ or ‘permanent’ and others as ‘secondary’ or ‘produced’ or ‘nonpermanent’. (Mill added ‘universal’ to the term ‘primary’.)4® Capital is spoken of as a ‘secondary’ agent in contrast to land and

labour, the two ‘primary’ agents.°° The classical economists treated land as a ‘free gift of nature’, a special factor of production distinct from man-made means of production and reproducible human labour. They used to mark their sense of the importance of land by classifying it as a separate factor of production instead of treating itas a particular species of capital.®! Land stood in classical economics for ‘the natural agents’. Say included Land in ‘the natural agents’, while Senior equated it with ‘natural agents’, and termed it as a ‘spontaneous agency of nature’. Malthus described it as a series of machines of unequal powers, ‘‘all susceptible of continued improvement by the application of capital to them.” Since it had not been produced by

human industry and was a free gift of nature, it was unlike the ‘manmade machines’ and had different qualities.» In the technical sense it was different from capital.®? Capital could be accumulated

or dissipated, but not land. This classical predisposition to regard land as not producible was held to be largely the outcome of thinking in physical rather than economic terms because, in reality, natural resources did not differ materially from the general run of capital goods in requiring initial development and subsequent maintenance charges.°4 Land, when it became scarce, was like the capital used on it as several neo-classicists (such as Clark) were apt to consider.*®

The rent of land in classical economics refers to the whole income derived from the possession of land. In Smith’s time it denoted ‘the periodical payments made to the owners of land, houses and other immovable objects by the tenants who enjoyed the use of them.’ Smith regarded it as ‘artificial and of Jater introduction.’*® Ricardo noted that in the popular sense rent included a return on investments made by landowners with a view to earning profit. But in the economic sense rent was ‘that portion of the produce of the earth’ which was paid to ‘the landlord for the use of the original and indestructible powers of the soil.’ Malthus did not proceed to a logical destruction of the entire difference between his series of

Classical Factor Classification (in Retrospect)

99

machines of unequal powers and plots of land of unequal fertility. Had he done so, he could have arrived very quietly at the true explanation of rent as a return for capital goods, determined by their porductivity.°” McCulloch followed Ricardo in defining rent. But Senior defined it as ‘the revenue spontaneously offered by nature or accident’; it is the ‘extra-ordinary remuneration’ for the “extra-ordinary. powers of body or mind’. This somewhat partakes of the character of the modern conception of rent. Mill includes in rent the return due to ‘capital actually sunk in improvements, and not requiring periodical renewal, but spent, once for all, in giving the land a permanent increase of productiveness.’ To the classicals, a unit of Jabour implied an individual labourer,

not a quantity of work done or of working time spent.5® They, as a rule, understood by workers not all those whose income must be classified

as

wages

but,

above all, the manual workers,

i.e., those

people who at once come to our minds when we use the term ‘labour problem’ and who not only form an economic category but also a social class.5® Mill broadened the term ‘labour’ to signify physical as well as mental work. The term ‘producers’ became all of a piece with the term ‘workers’ when only two, and not three, factors were considered. At the fag-end of the classical period labour was reduced to approximately more homogeneous bodies, as is evident in the work of Cairnes (who was the progenitor of the concept of ‘non-competing groups’). Wages in the classical theory connoted the whole income received by individuals from the performance of labour. In Smith’s time the term ‘wages’ was applied to denote amounts received by the less wel-Ipaid classes of workers from persons who undertook to accept their work at fixed rates agreed on before the labour was executed. Smith regarded wages as ‘natural and original’. The Ricardian theory of wages fitted only the wages of manual labour of the proletarian class.*

The capitalist class in classical economics was essentially

charac-

terized by the fact that it employed workers, provided them with materials and advanced the means by which they could maintain themselves. But whereas in classical economics land and labour were easily recognizable, capital was not for the reasons to be alluded to presently. Capital was treated, first, as a commodity that was produced by labour and, secondly, as something reserved as the present means of further production. Its quantity was subject to increase or decrease in accord with the decisions of individuals. One salient feature of the classical concept of capital was that it depended primarily on the functions of those commodities which constituted capital. These functions seem to have been understood in two main senses by the classicals, viz.,(1) In a technical sense in which commodities, such as food, clothing, materials, machinery and buildings served as a means of production, and (2) Ina distributive sense in which commodities yielded to their owners a particular kind of income, i.e., profit. In their definitions of capital some classical writers emphasized the first of these senses, whilst

Studies in Economic Analysis and Policy in Retrospect

100

others paid more attention to the second. The technical significance of capital lay in its being ‘an agent in or a pre-requisite of the productive process’, whereas its distributive significance lay in its being ‘the source of a particular kind of income’. The technical concept described how capital was employed, whilst the distributive concept explained why it was so employed and distinguished it from stock, which incorporated wealth used for the unproductive consumption of its owners.

inseparably Besides,

connected

capital

‘‘But,

and

conceived

were

in practice,

together

of in the

the

two

taken into

ideas

were

account.”

technical sense had got to be

distinguished in some way from other means of production, such as land and labour.® Another salient feature of the classical concept of capital was that it was functional rather than substantial. It related to the manner of use of a commodity and its destination in the economic process rather than to its intrinsic qualities. The notion that capital consisted of durable or long-wearing commodities sometimes employed instantly played very little part in the classical economic thought. The typical capital good was then regarded as something which was rapidly consumed and reproduced. The idea of mobility of capital as between different industries occupied an important place in economic analysis. This mobility was thought to be greater, the more frequently investors were required to determine the specific form in which their capital should be reproduced. The question of durability of a commodity had in itself litthe to do with the definition of capital. The only pertinent distinction was between commodities which were destined to serve for immediate and unproductive consumption and commodities which were destined to operate as instruments or means of production.®4 Smith used the term ‘capital’ in a three-fold manner similar to that in which the physiocrats had employed it, that is, (1) as an instrument of production (i.e., fixed capital), (2) as a fund maintaining the workmen (i.e., circulating capital), and (3) as a source of revenue (1.e,, reserved for immediate consumption). This division was made by him with the end in view of creating ‘a bridge’ between capital as a source of revenue (income) and capital as a means of production. In his time profit was a vague word applicable to almost any kind of gain, if some expense had to be incurred or some risk of loss borne in order to secure it. Profit like rent was

regarded by him as ‘artificial and of later introduction’. been criticised vehemently for his conception

Smith

of capital and

has

profit.

Thus it is pointed out that he was careless not to distinguish capital from stock. The two words were used by him as synonyms. He was on ‘a wrong track’ since a capital asset might or might not yield a revenue, resting on the mode of its use

(for instance,

a

dwelling

house). He did not succeed in creating two corresponding notions of capital as in the theory of production and as in that of distribution. st. Lewinski attributes this to his disregard for the fact that “the process of the formation of value and the production of riches

Classical Factor Classification (in Retrospect)

101

were quite different things.’’® Smith is alleged to have committed the same error as the physiocrats, who had confused the net product with the net revenue. Cannan accuses Smith of landing the entire subject of capital in the most unsatisfactory state by drawing ‘unscientific’ and ‘trivial’ distinctions between capital and stock, on the

one

hand,

and

between

fixed

and

circulating capital, on the

other. He confused the capital of a country with a particular part of its annual produce. He completely failed to prove his proposition that the amount of capital determined the amount of industry.® He is held responsible for introducing confusion into the subject by his attempt to attach ‘new meanings to the well-established and useful words’ like rent, wages and profit.® In the chapter captioned ‘‘On Taxes” in his Principles Ricardo defined capital as ‘‘that part of the wealth of a country which is employed in production and consists of food, clothing, tools, raw materials, machinery, etc., necessary to give effect to labour.” His capital was thus composed of disparate objects—a fact difficult to harmonize with the Smithian conception of the stock reserved for immediate consumption as not being part of the capital of a country. He was ‘‘apt to think that a word ought to have whatever

sense he found convenient to put upon it.’®§ Malthus took the capital of a country to be merely a part of its annual produce, that is, a part of its ‘accumulated wealth’. To him capital seemed to be nothing except the amount annually paid for productive labour. The idea of capital as a stock was wholly absent in him. James Mill equated capital with the instruments and materials produced in a given period just as well as their number existing at a given point of time. But at another place he equated it with the surplus of past production over past consumption and augmented by saving. McCulloch regarded capital as the whole accumulated or saved produce of past industry. In Senior’s works capital signified an article of wealth, the product of human exertion, employed in the production or distribution of wealth. Senior termed capital as ‘abstinence’, a factor the concurrence of which was germane to the existence of capital and which stood in relation to profit as labour did to wages. He saw point in maintaining that capital was ‘a factor with a difference’. But he did not inquire in what sense the words were actually used, and ‘‘what classification would be at once convenient and in reasonable consonance with their ordinary sense.’’® (J.S.) Mill defined capital as the stock ‘previously accumulated of the products of former labour and the product of saving’. It follows from the foregoing that the followers of Smith effaced the line of demarcation between capital as a means of production and capital as a source of revenue or income,

with

the

‘the distinction which Wagner and Rodbertus made. dered to be a great discovery (by Bohm-Bawerk).’’”° The partial declaration by the ‘epigones of the capital was the third independent agent of production land and labour had its serious shortcomings as listed

result

that

. . was consi-

classics’ that on a par with by Dobb: In

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Studies in Economic Analysis and Policy in Retrospect

the first place, it obscured the distinction between technical instruments of production and titles or property rights in them and in consequence, left no room for the crucial characteristics of income distribution (e.g., Marx’s narration of exploitation or Perroux’s narration of dominance). Secondly, it confused the stock of capital in existence with the rate of flow of new investment in addition to that stock. Thirdly, it was replete with the difficulty that were capital to be regarded as concrete instruments of production, homogeneity would be a still more essential pre-requisite, while were it to be regarded as paper titles to ownership, it could not be independently valued, except in terms of its yield.”!

Ill Let us now point out the departures from the triad doctrine of classical economics: First, inherent in the classical theory was also

the

idea

of a one-factor scheme, that is, of a ‘fundamental’ or

‘primary’ factor of production. Sometimes labour was taken to be the source as well as the measure of all value. At other times land was looked upon as the ‘fundamental’ factor of productionin unison with the physiocratic belief that eventually all economic goods sprang from the lap of nature.”* There was in Smith in this respect a great deal of ambivalence.”® At some places in the Wealth of Nations (for ex., Chapter Six) he mentioned only labour and did not mention land and capital at all in his theory of production. Land and capital appeared only as sources of revenue. Total product was ‘naturally’ the product of labour. Wages were ‘natural and original’; whereas rent and profit were ‘artificial and of later introduction’. They were deductions from production of labour: ‘They love to reap where they have not sown and demand a rent even for the natural produce of land’. It was this idea which later merged with ‘full force’ in the Marxian system.”* But Heimann considers this remark of Smith as ‘‘merely a passing expression of his general anti-capitalistic temper.’’ According to him, it is ‘‘not of much consequence in his system.’ Some unfortunate situations occurred. Capitalists and landlords alike at times oppressed the wage-earners. But, aside from minor variations, the laws of the market place regulated the deviation of wealth and incomes,” According to Schumpeter, Smith’s system seemed to point towards a different conceptual arrangement, which reserved the role of factor of production for labour alone and barred the outlook on the triad of factors in spite of the fact that his language on the first page of Chapter Seven was clearly suggestive of it.7° But at other places (Chapter Seven being one) Smith mentioned land and capital as’ factors of production co-ordinate with labour. In this way we have a peep into the gap or chasm that stands between the Smithian theories of production and distribution. Smith took no care to construct a theory of production on the basis of the classification he had made of the sources of revenue. What is more objectionable, ‘the distribution theories appear to have been introduced by him in

Classical Factor Classification (in Retrospect) his

work

too

late and,

103

as it were, from outside’ under the physio-

cratic influence—theories, which would be likened to ‘a foreign body which the organism is constantly tending to eliminate’.”” Say found fault with Smith for attributing to labour alone the power of creating value. More than Smith, Ricardo never got away from the conception that labour was a factor of production in some funda-

mental sense.”® Second, the old classical proposition

was that, in the ultimate analysis, there were only two factors of production, namely, Man and Nature.”® Petty was the pioneer of the idea that since capital comprised both land and labour it could not be an independent factor of production. Turgot had dealt with capital not as a means of production but as a factor of distribution. Ricardo subsumed capital under the heading of stored-up labour. Capital was past labour frozen into equipment. Senior included land in his capital concept by contending that it was impossible to distinguish between land and capital in production. Capital lost its mobility when invested in durable goods. It was the immobility of land rather than its absolute limitation that rendered it distinct from other factors. Both Mills believed that there were only two requisites of production— land and labour.*° Third, there were also latent suggestions and stray overtones of four-fold factor classification or the dyad as it is commonly known in classical economics. At times, a distinction was made between ‘the monied interest’ of inactive investors and the class of businessmen, who actively employed their own or borrowed capital. The merit of this approach lay in the fact that it was wedded to reality and from this it gained most of its interest and political appeal.®! Schumpeter takes pains to show how Smith was not absolutely ignorant of the entrepreneur since he spoke occasionally of the ‘undertaker’, the ‘master’, the ‘merchant’.

He would have accepted

the position that no business ran by itself. The merchant or master accumulated captital. That was his essential function. With this capital he hired ‘‘industrious people’, i.e., workmen who did the rest. He exposed means of production to the risk of loss. He supervised his concern in order to make sure that profit found its way to his pocket. Smith considered the case of the capitalist who lent his capital to other people and was thereby disposed to reckon with the distinct function of those people who took the trouble and risk of employing it. But, Smith’s businessman who borrowed from the capitalist still remained in Schumpeter’s nomenclature ‘a vicarious capitalist’, i.e., an intermediary between the owner of capital and the labour force. He provided the latter with tools, means of subsistence and raw materials.®”

Say was the first to assign to the entrepreneur—‘‘per se and as distinct from the capitalist’’—a definite position in the scheme of the economic process. ‘‘Just as Ricardo made the landlord the

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Studies in Economic Analysis and Policy in

Retrospéct

centre of his economic system, so Say made the entrepreneur the centre of his economic philosophy.’’*®* The function of the entrepreneur lay in combining the factors of production into ‘a producing organism’. This stood out with ‘unmistakable clearness’ in Say’s Traite’. Say was very emphatic that the return on capital had to be treated separately from the profit (which Newman calls ‘an added bonus’)*4 of the entrepreneur in the same manner as the function of the entrepreneur as the owner of capital had to be distinguished from his function as the organizer of a business enterprise. In Say the entrepreneur is not necessarily a member of a distinct social class, he is the performer of a distinct economic function. He is the linchpin, holding together landlord and capitalist, technician

and labourer,

producer and consumer.

Enter-

prise and capital are separate elements in the productive process.844 Of course, Say did not presumably see all the analytic possibilities of his dyad thesis, as Schumpeter explains. The task of combining factors becomes a distinctive one only when applied to the organization of a new one. All the same, it has to be conceded that Say ‘‘turned a pop lar notion into a scientific tool’? and made a notion that had been ‘‘implied or implicitly recognized

for ages’’ explicit.® Jt was ‘point of analyzing dence’ to

Mill who first ushered into English classical economics the view of the entrepreneur’ upheld before by Say. In the entrepreneurial function Mill went from ‘superinten‘control’ and even to ‘direction’, which normally required

‘no ordinary skill’. He wanted to make ‘risk-bearing’ an entrepreneurial function alongside of ‘direction’.8® He made a beginning in the area of separating interest from profit, but “‘much more was needed to meet the demands of a satisfactory explanation.’’®” IV The classical triad idea had its merits as well as demerits. As for its merits, it has been urged that the three factorial rewards were easily recognizable. The ‘holy’ or ‘great’ trinity or ‘trichotomy’ of the classicists roughly, if not exactly, corresponded to the three broad categories of national income.®* It coincided empirically with the fundamental distribution of income from the standpoints of society and individuals, who combined in their own

persons composite or joint functions and hence derived incomes of a mixed nature or content, easily tractable to the economist’s abstract differential analysis. As said above, being affianced to reality, it aroused considerable economic interest and commanded far-reaching political significance. The social classes conceived of by the classicals were applauded as ‘dynamic categories’.8® Fraser found a good prima facie case for regarding the the triad as being thoroughly satisfactory and faultless from the technical point of view. ‘‘No serious qualms need therefore be felt in accepting the tripartite classification of the earlier economists. on its technical

Classical Factor Classification (in Retrospect)

105

merits. The classicists were perfectly entitled to postulate as a tool of analysis and exposition that the productive resources of the community could be grouped into ‘‘classes of homogeneous and substitutable units.’

It has been further asserted that the classical triad facilitated the analysis of the problems in hand in simple and precise terms.®! The triad was commended also for being useful in that it enabled the analyst to group the multitude of specific requisites of production under three heads.” But its demerits have been far more transparent. A number of critics, notably Dobb, have accused that the classical notion of the class stratification of society and its origin was not quite clear. No distinction between factors of production could exist on ‘the purely formal plane’.®* Fraser has exposed its futility and argued that ina world in which the factor units generally failed to group themselves in perfect economic classes the classical triad could not finally yield accurate results inasmuch as we could not specify what or how many factor classes were there.** Schumpeter has insisted that the social classes were not ‘‘the creatures of the classifying observer but live entities that exist assuch . . . their existence entails consequences that are entirely misssed by scheme which looks upon society as if it were an amorphous assemblage of individuals or families.”®* Roll has noted that the classical identification of the requisites of production stood as ‘an implied but never-changing pattern. Marx condemned the triad as ‘a piece of vile apologetics, that, reducing colourful struggles of social classes to colourless allocation of returns to co-operating factors, emasculated capitalist reality.’ He advocated that any attempt to form economic categories other than social classes was bound to rob economic theory of its social

content.%’ Furthermore, as an analytical device the classical triad®’ of factors and rewards has been sharply criticised as ‘very unsatisfactory’ and ‘purely formal’,®* ‘confounded’®, ‘confusing and dangerous’ and ‘weak and irrelevant’ for value analysis, ‘by no means final’,!°! an ‘unlucky’ invention, ‘a relic of by-gone stages of analysis, a clumsy tool’, an ‘encumbrance rather than a help’,’® ‘narrow’, ‘otioze’,’® ‘acting as an obstacle in the way of the emergence of a comprehensive and illuminating theory of production’,1°® leading to ‘either useless or naive conclusions’?®” and

leaving the question of distribution ‘undecided.’!® But this does not exhaust the denunciation of the triad. There area good many modern economists who spurn the very idea of defining and classifying factors of production. Let us exemplify this. Knight holds that since land, labour and capital are composed of heterogeneous units, the entire notion of ‘factor of production’ is ‘misleading and unnecessary’. He pleads for its elimination from economic discussion as summarily as possible.1° Samuelson thinks that it would be useful to steer clear of the expression ‘factor of

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Studies in Economic Analysis and Policy in Retrospect

production’ co.npletely since it has been used in two unsatisfatory senses of denoting, firstly, broad composite quantities and, secondly, certain aspects of the environment having influence on production. He suggests the use in its lieu of the term ‘inputs.’!”° On the other hand, a number of authors consider it necessary to define and classify factors of production. As Schumpeter puts it, “The question what is and what is not to be ‘recognized’ by the analyst as an agent of production isa mere question of analytic convenience and efficiency. As such, however, it is very important; for the way in which awriter answers it will, toa considerable extent,

determine his scheme of the economic process and the formulation of the problems to be solved.”?!4 According to Fraser, ‘‘Factors of production are examined and classified not for their own sake but simply and solely for the light they may throw on the problems of value

and

distribution.”’

Since

markets

do,

in fact, exist for the

factors of production we need not abandon the concept of a factor class altogether. Instead we look ata factor in three alternative ways, viz., aS an agent in, or a pre-requisite of, the productive process; as a particular kind of commodity, characterized by the fact that it is useful not in its own right but as contributing to the making of other commodities, and as the source ofa particular kind or class of income.'!? Joan Robinson defines a factor of production as anything which has any technical differences at all from any other requisite of production, that is, something which has no perfect substitute. Her definition implies that anything that contributes towards output is a factor of production. That is to say, anything which forms part of the input going into the productive process at any stage and which helps to produce the output, the GNP, understandably is a factor of production."

The fact remains that the classical triad doctrine had _ its followers even after the close of the classical period. During the marginal period the majority of writers adhered to it, and hence to the parallelism between the items of this triad and the items of a corresponding triad of incomes. Bohm-Bawerk’s acceptance of it was ‘complete’, though his defense of it was ‘unoriginal.’!!4 This applied to Marshall notwithstanding his ‘formal introduction’ of a fourth factor, ‘Organization’. In Economics of Industry (first published in 1879) he mentioned first the triad of factors but later (in Chapter Seven) also mentioned the fourth one (namely, organization). As time went on, he did not ‘‘get further away from the traditional acceptance”’ of the triad as ‘‘the foundation of an exposition of production’; he rather came closer toit. His reluctance to depart from and add Organization to the traditional treatment was very well marked in the first edition of the Principles but this had faded out by the time its third edition appeared. His acceptance of Organization as the fourth factor of production

helped to maintain the symmetry of his recognition of Profit as the fourth share in Distribution. But in the eighth edition Organization is not an agent inthe same sense as the rest of the three factors

Classical Factor Classification (in Retrospect)

107

are. In Preface to its eighth edition he speaks of ‘‘a vast number of different agents of production.” He states that-‘‘the agents of production are commonly classed as land, labour and capital.’ He defines capital as ‘‘the main stock of wealth.” Capital is said to consist, in a great part, of knowledge and organization. ‘‘Knowledge is our most powerful engine of production; it enables us to subdue Nature and force herto satisfy our wants. Organization aids knowledge.’’!?® Organization is reckoned as adistinct agent of production in one strain by Marshall. But immediately in the next strain the correct stand is madeclear by him: ‘‘In a sense there are only two agents of production, nature and man, capital and organization are the result of the work of man aided by. nature.’’7® But, again, ata quite different place he reverts to the concept of the triad sharing national income.” Schumpeter questions ‘the analytic motive and the wisdom of the reduction of the triad to a dyad.’48 Davenport marvels at the “strange process of reasoning’’ by which the dyad is arrived at and the triad overthrown. He indicts the whole procedure as unfortunate, incomplete and inaccurate."4® Knight refuses to treat entrepreneurship as afactor of production at a par with others, for it is not at all measurable or subject to varying proportions and marginal imputation in the same sense.?2° This view is shared by Fraser.'2 Cairncross is not prepared to recognize enterprise as @ separate factor because it is not part of the available tangible, physi-

cal resources.'*?

Bain

deems it as “‘pointless for most purposes to

refer to a fourth productive factor corresponding to profits.’’}?% Seligman is most vocal when he says that the continuance of the tripartite separation of factors in the literature attested to its broad analytical usefulness and argues that toconvert all three factors into a single stream led inevitably up to ‘a blind alley’.1*4

Vv Let us now conclude: The classical triad was not only an exquisite analytical tool but also a fundamental social reality. It viewed society as a stratification of particular social groups corresponding to certain functions in the economic process. The three distributive classes of classical political economy were ‘no mere abstractions’; instead they were on all fours with the three social classes as they existed in reality. Whatever antagonism to the triad doctrine there was in the beginning was chiefly prompted by philosophical or political or emotional considerations and it subsequently revealed itself in the form of mere ‘verbal concessions’ to the doctrine, leading eventually to its complete anchorage in classical economics. On the one hand, the requisites or instruments of production falling in the triad were distinguished as (1) primary and Original and (2) secondary and produced, and, on the otuer, their rewards or distributive shares were distinguished as (1) natural and original and (2) artificial and of later introduction. So very

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Studies in Economic Analysis and Policy in Retrospect

complicated (and confused) was the classical exposition of this subject that whereas land and labour were easily recognizable, capital was not. One potent reason for this was that although, in principle, capital was defined in two alternative senses—technical and distributive—yet, in practice, they wére inextricably mixed up. Besides, capital was regarded as a functional rather than a substantial entity. The acceptance of capital as the third independent agent of production bristled with immense difficulties. The three notable departures from the triad idea proved to be of profound theoretical significance with the passage of time but immediately they lacked strength and support to overshadow or overthrow it from its widely acknowledged place of primacy—in classical theory. The marginalists belittled the triad of factors but countenanced the triad of incomes and operated with it their analytical frame. Marshall, who was instrumental in establishing the dyad in economic analysis, never really got over his mood of intense hesitancy

and

vacillation.

Nevertheless,

the

triad was attacked for its conception of society as ‘an amorphous assemblage of individuals or families’ and for its rigid factor classification. It was also attacked for its alleged analytical weaknesses. Some critics went to the extreme extent of decrying the very attempt at defining ‘factors of production’ or at classifying them as wholly misleading and unnecessary and wanted the term ‘inputs’ to replace the term ‘factor of production’. But these critics did not go unchallenged by others, who made an impassioned case for its retention since it was a great help in treating the problems of value and distribution in a convenient and ingenious manner.

References

1. G.S.L. Tucker, Progress And Profits In British Economic Thought, Cambridge, 1960, p. 76. Also, M. Dobb, On Economic Theory And Socialism, London, 1955, p.110 and W.A. Fellner, Modern Economic Analysis, Tokyo,

2. E. Cannan,

1960, pp. 102-103.

A History

of the

Theories

of Production

And Distribution,

London, 1917, p. 40.

Sy eh Pe ina pp.

4, 5. 6. 7. 8. 9.

The

Founders

of Political Economy,

London,

1931,

92-93.

Cannan, op. cit., p. 190. J.A. Schumpeter, The Great Economists, London, 1952. pp, 15-16.

E. Cannan, A Review of Economic Theory, London, 1929, p. 330. Dobb, op. cit., p. 94, and Cannan, Wealth, London, 1914, pp. 163-164. E. Roll, A History of Economic Thought, London, 1953 ed., pp. 372, 444. C. Gide and C. Rist, A History of Economic Doctrines, London, 1964 reprint, p. 239.

10. J.A. Schumpeter, History of Economic Analysis, London, 1967 (6th printing), pp. 554, 557. 11. Dobb, op. cit., p. 94.

Classical Factor Classification (in Retrospect) 12. J.A.

Schumpeter,

History

109

of Economic Analysis, pp. 558-561. Also,

A.C.

Pigou, Income, London, 1949, pp. 17-19; J.E. Meade, An Introduction to Economic Analysis And Policy, London, 1937 (2nd ed.), p. 255; and R.T. Bye, Principles of Economics, Bombay, 1964 (Sth ed.), p. 57. Meade and Bye : call them ‘‘primary”’ factors.

13. Cannan, A Review of Economic Theory, p. 284. 14. Cannan, A History of the Thzories of Production And Distribution, p. 140. 15. Schumpeter, History of Economic Analysis, p. 560. 16. Cannan, A History of the Theories of Priduction And Distribution, pp. 41-42. 17.

Cannan;

A Review of Economic Theory, p. 57.

18. Gide and Rist, op. cit., p. 126. }9. Cannan, A History of the Theories

of Production

And Distribution,

p. 40,

and Wealth, p. 164. 20. Gide and Rist, op. cit. p. 74n. 21. A Review of Economic Theory, p. 292.

22. 23. 24. 25. 26.

ibid., p. 54. ibid., p. 189. Schumpeter, History of Economic Analysis, p. 567. H.W. Spiegel, The Growth of Economic Thought, New Jersey, 1971, p. 259. Cannan, A History of the Theories of Production And Distribution, p. 40.

27.

This distinction came to be stress2d also

F.H.

Knight,

Risk,

Uncertainty

And

in later works.

Profit,

K.£. Boulding, Economic Analysis, London, P.A. Samuelson, Foundation of Economic

See, for example,

London, 1957 ed, Preface;

1955 (3rd ed.), pp. Analysis, Cambridge,

201-202; Mass.,

1947, p. 84; F. Benham, Economics, London, 1955 (Sth ed.), p. 103; M. Fleming, Introduction to Economic Analysis, London, 1970 impression, pp. 115, 197; E. Whittaker, Elements of Economics, New York, 1947 reprint, p. 10; Fellner, op. cit., p. 64; and Joan Robinson, The of Imperfect Competition, London, 1954 ed., pp. 18-19, 108-109.

28. 29. 30. 31. 32. 33.

Economics

Cannan, A History of the Theories of Production And Distribution, pp. 192, 381. The Founders of Political Economy, pp. 109-110. Cannan, A History of the Theories of Production and Distribution, p. 41. Schumpeter, History of Economic Analysis, p. 560. Cannan, A Review of Economic Theory, p. 55. Economic Doctrine And Method, London, 1954, pp. 105-106.)

34. Cannan, A Review of Economic Theory, p. 57. 35.

Schumpeter, History of Economic Analysis, p. 530. Also (1) Cannan, A Tisony. of the Theories of Production And Distribution, p. 42 and (2) J.P, Bell, A History of Economic Thought, New York, 1953, pp. 261-262. 36. History of Economic Analysis, p. 560. fqn Ee ths 37. Spiegel, op. cit., p. 300.

33. Cannan, A History of the Tizories of Production And Distribution, p. 358. 39. ibid., p. 123. 40.

Cannan, A Review of Economic Theory, p. 41. Robbins, Robert Torress And The Evolution

41. L.

of Classical

Economics,

London, 1958, p. 62. 42. Cannan, A Review of Economic Theory, pp. 55-57.

43. 44,

History of Ecoo-nic Thought, New York, 1936 (3rd ed.), p. 750. (a) op. cit , pp. 47-48, 91 and (b) A Review of Economic Theory, p. 303.

45.

Can:an, A Review of Economic Theory, p. 303.

110

Studies in Economic Analysis and Policy

in Retrospect

46. H. Myint, Theories of Welfare Economics, London, 1948, pp. 5-8. 47. Essays On Value And Distribution, London, 1960, p. 174. 48.

Risk, Uncertainty And Profit, London, 1957. ed.

49 S.J. Chapman, Outlines of Political Economy, London, 1917, p. 68. 50. Wicksell (Lectures on Political Economy, Vol. 1, London, 1951, 6th impression, pp, 107-108, 185) regarded land and labour as ‘‘two original,

present

or

direct

productive

forces’?

and

capital

current,

as ‘‘a combination of

accumulated labour and land.’? Some modern economists like Kaldor, op. cit., and Knight, op. cit., do not agree with this distinction. There are others like Meade, op. cit., p. 255, who consider all the three factors

to be primary. But some other modern economists agree withit. To illustrate, Robertson (Lectures On Economic Principles, Vol. I, Indian Reprint, Bombay, 1961, pp. 101-102) considers it a ‘tidier method of approach’ to maintain that there are two primary agents, Nature and Man. Benham (Economics, London, 1955, 5th ed., p. 102) upholds the two-fold

classification into Man and his Environment with a corresponding

division

of income into income from work and income from property for some purposes as more realist'c. Bain (Pricing, Distribution and Employment, Indian reprint, Calcutta, 1953, p. 461) designates land and labour as ‘basic’ factors. Kirkaldy (Wealth, London, 1920, pp. 22-23) regards land and labour as factors or agents and capital as an instrument of production. Chapman (op. cit., p. 68) considers land and labour as ‘absolutely indispensable’ agents of production. There are yet others like Meade (op. cit., p. 255) who deem all the three factors as primary.

51. J.R. Hicks, The Social Framework, Oxford,

1952,

p. 73.

Wicksteed

(The

Common Sense of Political Economy, Vol. I, London, 1946, p. 365) labelled the distinction between land and capital as ‘theoretically worthless’ and, ‘arbitrary’. But Meade, op. cit., p. 257 refuses to reduce capital to land and labour and regards it as a factor of production independent of the two.

52.

B.F.

Catherwood,

Hutchinson,

Basic

Theories

of Distribution, London,

1939 and T.W

A Review of Economic Doctrines, Oxtord, 1953,

53. L.M. Fraser, Economic Thought And Language, London,

1937, pp. 226-227.

54, Hutchinson, op. cit., p. 87.

55. The Distribution of Wealth, London, 1925, p. 157.

56. Cannan,

A History of the

pp. 190-191, 200.

Theories

of Production

And Distribution,

57. Catherwood, op. cit., p. 77. 58. Fraser, op. cit., p. 347.

59. Schumpeter, Economic Doctrine And Method, pp. 104-107. 60. inid., pp. 104-105. 61. Schumpeter, History of Economic Analysis, p. 553.

62. Tucker, op. cit., pp. 82-86. 63. Fraser, op. cit., pp. 233-316. 64. Tucker, op. cit., pp. 80-81. 65. op. cit., pp. 78-87.

66. Cannan, A History of the Theories of Production And Distribution, p. 89. 67. Cannan, A Review of Economic Theory, p. 303, See footnote No. 44 above.

68. Cannan, A History of the Theories of Production And Distribution, p. 195. 69. ibid., p. 196. 70. st. Lewinski, 71.

op. cit., p. 83.

op. cit., pp. 138-139.

72. Pigou, op. cit., pp. 17-19.

Classical Factor Classification (in Retrospect)

111

. Spiegel, op. cit., p. 250 . St. Lewinski. op. cit., pp. 78-87. History of Economic Doctrines, New York, 1945, p. 69. . History of Economic Analysis, p. 558. - P.C. Newman, The Development of Economic Thought, New York, 1952, p. 66.

. Fellner, op. cit., pp. 102-103. Certain modern economists (take Joan Robinson for instance in Accumulation of Capital, London, 1956, pp. 310311) defend the on2-factorscheme sin‘e in their opinion, from a short-run point of view, it is more convenient to treat labour as the only factor of

production. But Knight, op. cit., either believes in ‘an infinite variety of factors’ or only One factor, that is, capital, Capital is theoretically allinclusive. It is not a group of things but a generic term for all productive services. Knight’s view smacks of the neo-classical outlook which not only elevated capital but also recognized it as the most active factor in the triad. (See Cannan, A History of the Theories of Production And Distribution, p. 398) Pareto and Walras went to the extreme extent of considering

Man aScapital

and

distinguished

the sources

of income

from

income

as such.

IS) Schumpeter, Ten Great Economists, pp. 166-167. 380. This two-fold factor classification has its defendants among the modern economists too.

To

illustrate,

Joan

Robinson

(Accumulation of Capital,

pp. 310 311) takes the line that from a long-period point of view there are only two factors of production in the whole economy, natural resources and labour. Fraser (op. cit., p. 360) adjudges the line of demarcation

between land and capital to be ‘tenuous’ and holds every rent payment be interest and every interest payment to be rent ‘in the last analysis’. 8I. Tucker, op. cit., p. 76.

82. History of Economic Analysis p. 555. 83. E.H. Patterson, Readings in the History of Economic 19325 pe 62s 84. op. cit., p. 91. 84a

Thought,

New

to

York,

See G. Koolman’s paper ‘‘Say’s Conception of the Role of the Entrepreneur” in Economica, August 1971.

85. History of Economic Analysis, p 555. 86. ibid., p. 556. 87, W.A. Scott, The Development of Economics, New York, 1933, p. 302. Wicksell (op. cit.) was reluctant to accept Marshall’s dyad for the simple reason that it was based on ‘certain somewhat hasty conclusions’ and unlike the old triad Jacked ‘quantitative precision’. The dyad doctrine became assimilated in economics on account of Marshall’s

contributions

to

it.

Precedent

speak of only three factors of production; factor

was

yet

to

be

assigned

to

them,

it was customary to

the entrepreneur

as the fourth

his due place in the text-books.

See R.T.

Ely, Outlines of Economics, New York, 1910, pp. 122, 126, 127. After publication the word ‘entrepreneur’ came to imply

the

policy-maker.

their See

Chapman, op. cit., p. 69. Despite opposition the dyad is to be met with in most popular texts of today insofar as it has its conveniences, ‘especially in its rough correspondence to familiar categories of income’’ (vide Robertson, op. cit., pp. 101-102).

88. Tucker, op. cit.. p. 76; st. Lewinski, Accumulation

op.

cit., pp.

of Capital, p. 14; G. J. Stigler,

92-93;

Production

Joan And

Robinson, Distribution

Theories, New York, 1948, p. 151; A. Gray, The Development of Economic Doctrine, London, 1931 ed., p. 131; and Cannan, A History of the Theories of Production And Distribution, pp. 191, 393. 89. Cannan, op. cit., pp. 207-208, 358-359.

112 90. 91 . On O3F

Studies in Economic Analysis and Policy

in Retrospect

Fraser, op. cit., pp. 351-359. Schumpeter, History of Economic Analysis, pp. 554, 557, 559. Fellner, op. cit., pp. 102-103. Dobb, op. cit., p. 94. Also his older book, Political Economy Capitalism, London,

And

1950, Sth impression, p. 182.

94. op. cit., pp. 358-359. 95. Ten Great Economists, pp. 15-16. 96. op. cit., p. 372. 97. See Schumpeter, History of Economic Analysis, pp. 551, 559. 98.

P.H. Wicksteed, The Common

Sense of Political Economy, Vol.

1, London,

1946, p. 365. 98a. ibid., 99. st. Lewinski, op, cit., pp. 92-93. 100. Fraser, op. cit, pp. 207-208, 211. Also Schumpeter, History of Economic Analysis, pp. 559, 561. 101. T.N. Carver, The Distribution of Wealth, New York, 1908, p. 85. 102. Cannan, A History of the Theories of Production And Distribution, p. 329. 103. Schumpeter, History of Economic Analysis, p. 557. 104, Wicksell, op. cit., pp. 107-108. Davenport (Tie Economics of Enterprise, New York, 1923, p. 421) and Knight (op. cit.) are highly critical of the classical triad and reject it outright.

105.

B.B. Seligman, Main Currents ed.), pp. 654-655.

106. 107. 108. 109, 110. iB, 1123 WS).

Cannan, A Review of Economic Theory, pp. 55-56. Schumpeter, Ten Great Economists, pp. 166-167. Cannan, A History of the Theories of Production And Distribution, p. 199.

in Modern

Economics,

Glencoe,

1963 (3rd

Op aClbes

Foundations of Economic Analysis, Cambridge, Mass., History of Economic Analysis, p. 561. op. cit., pp. 210, 326.

1947, p. 84.

The Economics

1954

J08-109.

Her

of Imperfect definition

was

Competition, app!auded

Nature And Significance of Economic ‘formal elegance and economy’.

Positive view.

Economics,

London,

London, by

Science,

See also R.G.

1966

ed.,

pp. 18-19,

L. Robbins (An Essay On the

(2nd ed.),

London,

1948

ed.)

for

Lipsey, An Introduction

pp.

114. Stigler, op. cit., pp. 192-193. WES)c, Principles of Economics, 8th ed., p. 138. 116. ibid , p. 139. Oe ibid., p. 565. 118. History of Economic Analysis, p. 901. Se ODE citi, Da loos 4 lee 120. QD) Clinsupe laix. 121. op. cit., pp. 326-327. 2%, Introduction To Econo-nics, London, 1954 ed., p. 45. 123. op. cit., p. 463. 124. cp. cit.

230 231,

its To

for a similar:

CHAPTER

SEVEN

Production Functions in Economic

Analysis This chapter starts off by defining ‘Production Function’ and then attempts to put the subject in its historical perspective. The symbolic presentation of production function follows this attempt. In the succeeding section the different types of production function are discussed. Next, we explain the concept of ‘elasticity of substitution’ in relation to factor combinations. The sixth section is concerned with an exposition of iso-quants. This leads us on to the study of the effects of a change in the price of a factor. The ‘limits of production’ pre-occupy us immediately after. In the ninth section we analyse the linear homogeneous production function. The Cobb-Douglas Production Function is examined subsequently. Having done so much exercise, we pause and look critically at it in retrospect. The chapter concludes with an enquiry into the applicability of production function to the problem of distribution. I. The Concept of Production Function ‘Production Function’ is the name given to the relationship between the rates of inputs of productive services and the rate of output of a product.! It is the technical relationship telling the amount of output capable of being produced by each and every set of specified inputs (or factors of production).? It demonstrates the maximum output attainable from any set of quantities of ingredient inputs and flows of services of other inputs, subject to the constraint that the set of inputs and outputs must be non-negative. It is ‘‘a single-valued mapping from input space into output space’ since the maximum attainable output for any stipulated set of inputs is unique. Every production function is limitative in the sense that an increase in each input for an increase in output is both a necessary and a sufficient condition.

‘Production function’ is a relationship between time flows, and not between timeless stocks, for production is a process, and not an act. Its time-dimension cannot be neglected. It shows the relation between the physical quantities of inputs and the physical quantity of output achieved per period of time.‘ It is defined for a given state 4

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Studies in Econoniic Analysis and Policy in Retrospect

of technical knowledge. It is the economist’s summary of technological knowledge. Economists are generally interested only in the best (or, like Marshall, in the average) techniques. The state of technology becomes a parameter of the production function.®

For

a producer

a production

plan is ‘‘a specification of the

quantities of call his inputs and all his outputs.” Outputs are represented by positive numbers, inputs by negative numbers. A given produc ton may be technically possible or impossible for the producer. His production set comprises ail the productions possible for him. The inputs of a production which are inputs at one date may reappe ras cutputs at a later date in a different condition. Broadly speaking, inputs and outputs jointly contain only a relatively small number of commodities. In other words, most co-ordinates of the set are null. To the various types of activity correspond production sets with different characters. A production is classified as possible or impossible for the producer on the basis of his present knowledge about his present and future technology. The certainty assumption implies that he knows now what input-output combinations will be possible in the future. Choosing a production amounts for him to distributing optimally over time and over space his inputs and his outputs.® Traditionally production alternatives have been described by economists not by a set but by a production function. This is why Koopmans writes that a production function represents ‘‘the efficient boundary of the production set.’’6¢

The phrase ‘production function’ can be used synonymously with the ‘‘optimal organisation of production in the engineering sense.’? From an engineering standpoint the distinction between inputs and outputs is simply that the former precede the latter in time’. But, as Shackle observes, the question how a given output can be most cheaply produced cannot be answered from ‘engineering’ knowledge alone. Knowledge of the prices and supply conditions of factors is equally relevant

This is why

Gerald

Shove

saw

“each man, machine and acre of land as something as individual as a piece of a jigsaw puzzle and the firm’s chief problem as the careful fitting together of these pieces.’”®

Il. Production Function in Historical Perspective The classicists meant ‘production function’ by the term ‘the state of the arts’. They assumed that capital and labour were used in a fixed proportion but through substitution for land they were used in a variable proportion to output.’ In Ricardo the co-efficients of production are fixed but switches in technique are possible."! In his work we have a composite marginal product of a combined ‘composite dose of labour and capital, and not of each factor Separately.

Production Functions in Economic Analysis

115

von Thunen postulated the law of substitution between factors of production. The production functions used by Jevons, BohmBawerk and Taussig incorporate time. Walras employed universally fixed technical co-efficients of production. In him we have a single process or method of production using the same quantities of the different inputs. His production functions are continuous. But they are branded by Schumpeter as ‘‘degenerate’’. Pareto was the chief exponent of that type of production function in which~ some co-efficients are fixed and others variable. The production function enunciated by Clark, Wicksteed and Wicksell is aggregative or socia! by implication. Particularly. Wicksteed’s production function is homogeneous

of the

first

order,

shorn

of economies

or

dis-

economies of scale. But the preceding summary of the neo-classical production function is viewed differently by Hicks. Hicks questions the appropriateness of the expression ‘the neo-classical production function’. He writes, ‘‘There is no ‘production function’ in Jevons or Marshall, Walras or Pareto, Menger or Bohm-Bawerk.

There

is

in Wicksell, but he is careful to confine it to his model of‘production without capital’. J. B. Clark can hardly be regarded as a major neo-classical economist. The originators of the ‘production’ function theory of distribution (in the static sense, where [I still think that it should be taken fairly seriously) were Wicksteed, Edgeworth and Pigou.”!? 5 By 1900 most economists had adopted universally variable co-efficients of production. Economics had emerged as a science, logic or map of human choice. Choice had to be exercised between different methods or processes of production using different quantities or units of different inputs with a view to maximising net revenue Or minimising total cost of production, given prices of

products,

prices of factors

and

the market demand for them. In

recent years in input-output analysis and linear programming co-efficients of production have exerted more appeal.

fixed

Ill. A Symbolic Presentation of Production Function Assuming that (1) the factors of production are continuously divisible and (2) the process of production is continuously variable, we can have a production function as follows:

Opag RUE Keer. ). This production function states that Q is the maximum amount of output of a good or service which a firm can produce if it uses exactly I units of 1, J units of j,K units of k, etc. This production function pre-supposes a set of optimality calculations on the part of the technocrats in a firm.!* Such a continuous production is differentiable twice in all directions; we can have derivatives of derivatives. But

it does not correspond to reality since it is inapplicable to the cases of discontinuities and to thcse which lack partial (for example, marginal product of factors) derivatives of the first and the second order.

116

Studies in Economic Analysis and Policy in Retrospect The following is another production function of a firm: x=F (a,:b,.c,.....«\.), where.x 41s output and a,b, C,. =:

are inputs. The characteristics of this production function are: (1) It is single-valued. (2) It is continuous. (3) It is twice-differentiable. The first partial derivatives are the non-negative marginal products of a, b, c and the second partial derivatives are negative.’4 (4) It represents what is called an efficiency frontier in that it provides the largest output which can be produced for given input rates. It assumes that all related engineering decisions have been made, and we are as such left with the best engineering technology, which presents a multiplicity of input combinations, choice among which is an economic decision, requirmg knowledge of input prices too.?®

IV. Types of Production

Function

Production functions can be of three types,?® viz., I. Co-efficients fixed by technology; II. Co-efficients variable; and III. Some coefficients fixed and others variable. The first-type production function presupposes that each level of output requires technologically a unique combination of inputs. Its illustrations are: P=A/3; P=2B. That is, it requires 3 units of A to produce one unit of output, and this co-efficient cannot be reduced by using more of B. No real economic illustration of this type of production function has been found hitherto. It is therefore of mere academic value. In the second type, the same level of output can be produced by two or more combinations of inputs. There will be no limitational inputs (defined as those inputs an increase in the usage of which is a necessary but not a sufficient condition for an increase in output). A production function of this type can be written thus: P=4/AB. Here the co-efficient of production is freely variable. We can use much or little A per unit of output, provided we use little or much B as well. Examples of the third-type production function are: P=4/ AD; P=E. The co-efficients of A and D are variable unit of Eis required for each unit of the product.

but

one

V. Elasticity of Substitution Central to the concept of production function is the notion of elasticity of substitution (es ) between factors. es is the measure

of the ease with which one factor can be substituted for another factor while maintaining the output intact. es is the percentage change in the relative amounts of factors employed consequent upon a given change in their relative prices or marginal products. It is the proportional change in total product associated with the proportional change in the variable input. Typically, it is zero when the inputs are mutually limitational. It is strictly positive when the inputs are mutually limitative. It is a pure number independent of

Praduction Functions in Economic Analysis

117

the units in which inputs and outputs are measured. trical

relation,

that

It is a symme-

is, a function of the input point at which it is

measured.?7 Product curves,

contours

or

surfaces

or frontiers

any of the following four shapes, depending upon the between the factors employed (see Fig. 1 to Fig. 4).18

can

assume

degree of es

In Fig. 1 the product curve is /d as the two factors are complements. But such acase is ruled out because we increase either A or B in isolation.

perfect cannot

In Fig. 2 the product curve is a rectangular hyperbola when we have the two factors as imperfect complements or imperfect substitutes. This occurs when there are constant returns to scale. We have such a product curve asin Fig.3 when A and B are perfect substitutes. This case is again ruled out for, then, they become identical, i.e., only one (malleable) factor. y

Bfacior

O

factor A

FIG. 1

factor B

Oe

factor A

FIG. 2

1118

Studies in Economic Analysis and Policy in Retrospect

Oo

factor A

FIG. 3

re)

factor A

FIG. 4

In the case shown in Fig. 4 A and B are negative substitutes. The production function tool has proved to be versatile in its use: at the level of analysis of a firm, an industry or even the entire economy (in the form of ‘transformation function’). Its use for the representation of technical possibilities has produced enormous valuable insight in the market behaviour: of the profit-maximising firm. With its help the responses of the firm to changes in prices and in conditions of demand for its product(s), of supply for its factors, have been studied intensively.18¢ However, the production functions which we have discussed so far

do not take into account (a) the rates-of change of the rates of inputs and time, (b) the lags in some of them, (c) the cumulation (integrals) of others, and (d) the outputs that are expected not for the immediate but for the more distant future.’® It is further alleged

Production Functions in Economic Analysis

119

that the notion of a production function is ‘‘awkward” for those production processes in which the number of inputs and outputs is larger than the nunber of numerical parameters that are needed to distinguish the process from other available processes. Finally, the definition of a production function presupposes a_ physical maximisation of cutput from given inputs. This is all right in a market economy. But in analysing highly complicated management problems a production set has an edge over 4 production function. Economics has suffered, laments Koopmans, from looking on the production function as a boundary of its domain of competence. He argues, ‘‘Without a more thorough analysis of the choices open to the productive establishment, the economist’s prescrptions for profit maximation are non-operational and his descriptive assumption of profit maximisation is nct subject to direct empirical test. Rare is the industrial firm that knows and charts its own production function as the economist defines it. The form in which knowledge of technological possibilities is kept and transmitted is normally

quite different.’"19¢ VI. Iso-quants Let us now turn to iso-quants, which originated with Ragnar Frisch. An iso-quant (or iso- or equal-product curve) is a locus of

input combinations, all of which are capable of producing the same output.?° An iso-product map is a family of iso-product (constant output) contours. In Fig. 5, x,, X2, X3, X, are the various quantities of output. They are shown by contours or iso-quants or iso- or equal-product curves. These curves have the following properties?!: (1) They have a negative slope (that is, are downward-sloping). (2) A higher curve denotes a higher level of output. Both these properties assume nonsatiety

on

the

producer’s

part,

i.e., absence of the bliss point. In

y

0

factor A

FIG. 5

4

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Studies in Economic Analysis and Policy in Retrospect

other words, they assume that the producer is not oversupplied with either input. He prefers to have more of either or of both. (3) No two iso-quants can cross or intersect each other. This assumes both non-satiety and transitivity. Transitivity implies consistency of choice. If the producer is indifferent between combinations

a

and b, and between combinations b and c, then he

is, by the same token, indifferent between a and c. This is imperative for consistency. (4) Iso-quants are convex to the origin. This constitutes the stability condition. This property presumes a diminishing marginal rate of substitution. (5) No pair of iso-quants need be parallel in any sense, otherwise es would be «, and A and B would become perfect substitutes. (6) The slope or gradient of an iso-quant shows the ratio between the prices or marginal products of A and B. (7) Corner solutions are excluded insofar as both inputs

are desired. (8) Iso-quants are continuous curves because the inputs are continuously divisible. Summing up, we find that the rationale

of the product curves is closely analogous to that of the indifference curve analysis. The production function exhibits the scope and limitations of production as determined by technical conditions, which the econo-

mist

cannot

change

and

must

accept

as given. These technical

conditions of production may be rigid, or they may be flexible. The iso-quants and productivity curves together describe the firm’s production function. They express not only the technical but also the human characteristics of the conditions under which it operates. Its production function expresses its production possibilities as they actually are, and not as they would be under ideal conditions.”

There are two ways in which we could determine the shape of the producer’s iso-quants. One, we could determine it from his behaviour in the markets where he buys the factors of production, assuming that his behaviour is rational and actuated by the desire to maximise profit. Two, we can determine it directly from a few elementary assumptions about the nature of a production function itself."

The

price line or ray*4 is also

the budget line, constraint or

horizon. In Fig. 6 PP and P’P’ are price lines. A price line is a line of constant expenditure or outlay. It is the firm’s budget constraint. It is a straight line because of the assumption of perfect competition. The prices of inputs are constant to the firm. Its slope or gradient gives the marginal product or the price ratio and indicates the MRS.

In Fig. 6, OA is the expansion path of the firm in question. It is the locus of all tangency points. Boulding nomenclatures it as the ‘scale line’. For any level of output the least-cost combination of A and B would be achieved at the point of tangency between a price (outlay) line and an iso-quant (product. contour). At this point the ratio between the marginal products (MPs) of A and B would equal the ratio between their respective prices such that

Production Functions in Economic Analysis

121

y

factor B

50)

factor A

P

PZ

MPA_ PA MPB

PB’

As the level of output rises, more of both A and Bis More outlay is thus incurred.

required

and

VII. The Effects of Changing Price

‘Production Function’ is a constraint upon a firm’s behaviour.?> The entrepreneur has to make decision at three levels®: (a) the proper combination of the inputs, (b) the proper quantities of each input for the quantity of the product he desires, and (c) the quantity of the product. These decisions are interdependent and have to be made simultaneously. The entrepreneur will normally choose simpler techniques for small rates of output. His rate of output will depend on his ability to produce cheaply, which, in turn, will partly turn on the techniques open to him. Moreover, he cannot determine the quantities of the given inputs to be employed for a given output unless he knows their prices, and he cannot know his output unless he knows the prices of his inputs.

The best combination of inputs is that which the entrepreneur can purchase for the least amount of money. The least-outlay combination hinges on the relative prices of inputs. The rate of product substitution of input A for input B may be defined as the quantity of input A which must be substituted for one unit of input B in order to leave the total product unaffected. It is equal to the ratio of the marginal productivities of the inputs. Likewise, the rate of outlay substitution of input A for input B is the quantity of input A which must be substituted for one unit of input B in order to leave the combined outlay on two inputs unchanged. It is equal to the ratio of the marginal costs due to the inputs. The least-outlay

122

Studies in Economic Analysis and Policy in Retrospect

combination is that at which the rate of product substitution

is just

equal] to the rate of outlay substitution.*’ Thus, |

PA Pp

_MPA MPs.

_MCA MCB~

This is depicted in Fig. 7. Given the quantity of A, the B curve in Fig. 8 indicates the quantity of B which can be combined most profitably with that quantity

of A.

Similarly,

for

the

A

curve. The best combination

between A and B is given by the point of intersection, P. A change in the relative prices of inputs changes the proportions. in which they are used but the change in their proportions is contingent upon their product substitutability. Equal proportionate changes in the prices of all inputs cause a change in the scale only.

Outtsy

Contosy

@ 90 AMINO [POS

Outlay Contour

A curve

B curve

factor B

oO

factor A

FIG. 8

Production Functions in Economic Analysis

123:

Cy Cy and C, C, in Fig. 9 are respectively the original and the changed outlay lines. {is the product contour. The price of A is. ailowed to rise relatively to that of B. C, C, is steeper than C, C). P, is the point of tangency between the original outlay line and the given product contour. P, is the point of tangency between the changed outlay line and the same product contour. As the price of A rises, more of Band less of A are used. The cheaper factor is. substituted for the dearer. S, and S, are scale lines. On the scale line the rate of substitution for the product and the rate of substitution. for the outiay are equal. The scale line enables us to split up the problem of production into its two rough parts, namely, one, the problem of the proportions of input quantities and two, the problem of the scale of operations. 2¢

Factar B

Factor FIG. 9

A

XK

When the price ofa factor changes, it entails two effects, viz., the substitution effect, which depends chiefly on the elasticity of substitution between factors and the scale effect, which depends primarily onthe importance of the factor concerned. In Fig. 10 R, is the product curve representing combinations of A and B vielding the most profitable output before the price change. RR, is the’ product curve representing them after it (the price of A has risen).

OS, is the scale line before the price change. OS, is the scale line after it. Whilst the substitution effect makes for a rise in the quantity of B bought, the scale effect makes for a fall in the quantity of A bought. Were the substitution effect to exceed the scale effect, the quantity of B bought would increase. On the other hand, should the scale effect exceed the substitution effect, the quantities bought of both A and B would decrease. The scale effect is usually absent

during the short run.”® The effect of a change inthe price of any factor on a given industry called as the industry effect can be studied in two parts: First, the effect on the profitability of investment in an industry and

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Studies in Economic Analysis and Policy in hetrospect

second, the effect on its size, i.e., entry and exit of firms into and The industry effect as a whole will from the industry respectively.

be large when (i) the input is important, (ii) the maginal firms are large in number, (that is, when production approaches constant returns to scale) and (iii) the demand for the product is elastic.*® y

factor B

Oo

factor A

FIG. 10

VIII.

The Limits of Production

In Fig. 11, OA and OB are ridge lines. A ridge line is a locus of iso-quant points. On it the marginal product (MP) of the input (of Aon OA or of Bon OB) and the marginal rate of substitution

4Sab) are both zero. The choice of the firm is confined within the technical limits represented by the area between the two ridge lines. 00' is the expansion path. There are three possibilities: (1) When the production function is linear and homogeneous, i.e., when there y

factor B

O

factor A

rent

Production Functions in Economic Analysis

125.

are constant returns to scale, then the optimum point P can be located anywhere on the expansion path, and hence its location is not easily determinable. (2, When the degree of homegeneity exceeds unity, i.e., when there are increasing returns to scale, P would lie farthest away on that path. (3) When the degree of homogeneity falls short o unity, i.e., when there are decreasing returns toscale, P would lie close to the origin.%°_ This can be put in an alternative form*': (1) If the product surface is linear and homogeneous with constant returns to scale, then any diagonal from the origin will be divided into equal segments by the successive product surfaces, as shown in Fig. 12 below, such that OP=PQ=QR=RS. Input-output ratio is constant. (2) When there are diminishing returns to scale, then the segments are increasing such that OP RS. The steeper (see Fig. 14). Input-output ratio is falling.

surfaces become

ry A

B factor

Oo

factor A

FIG.

14

The points where the iso-quants become parallel to the axes show the limits within which substitution is possible. But although the producer will always try to remain within the region of substitutability, he is not always able to do so because he is seldom free to vary at will the quantities and proportions in which his factors are employed.*%

In the short run the production function cannot remain uniform with increases in output because the law of diminishing marginal productivity implies that the rate of inputs of factors ultimately grows more rapidly than the rate of output of the product. On the other hand, in the long run the production function may remain uniform, or it may vary so that the rate of inputs of factors grows more rapidly than the rate of output of the product, or the reverse.*4 We said in the foregoing passages that there are certain technical limits within which the entrepreneur has to choose the optimum combination of factors of production. This point needs alittle elaboration. On the one side, there are opportunities or possibilities available to him; he has resources and techniques.*®> On the other side, we have resistances or obstacles or deterrents to his actions, which are of two types, viz., technical and psychological,*® and which are translated into cost computations or cost functions. Let us enumerate them. In the first place, the supplies of the factors are generally more scarce during theshort run. But, unlike the consumer, the producer does not suffer from the limitation of

Production Functions in Economic Analysis

127

the quantity of factors before hand. If he makes abnormal profits, he can borrow and expand his business concern.3? But further limits upon its expansion stem from the increasing difficulty of management and contrcl as well as the increasing element of risk. Besides, the extent of the market demand given to him is limited because of the imperfections of the buying and/or the selling market.*> To a degree, his asset preferences (i.e., the will to maximise net worth instead of net revenue) and his fear of the worst may add to his above-mentioned difficulties. However, we have to bear in mind the salient distinction, which is this that in spite of the imperfections of the factor and product markets and notwithstanding his asset preferences he can attain a true maximum (i.e., maximum maximorum). But when he has to encounter uncertainty and increasing risk andto suffer from the fear of the worst, then there will be only a boundary or constrained maximum. In Kalecki’s opinion, the larger his own investment in his concern, the greater the danger from the sacrifice of liquidity. Scitovsky’s idea is that a firm may prefer to retain the control to itself and hence it may not enhance its size if called upon to borrow from outside, for the outsider may want a hand in its administration.®® The aid of uncertainty has to be invoked in order to surmount the difficulty arising from the fact that his firm has no natural span of life (for it may as well be swept away by loss overnight) over which his profits are to be maximised

and,

therefore, the

profit maximisation period

becomes essentially arbitrary. He has to maximise the present value of his expected stream (spectrum) of profits (net surpluses). A firm will not be a profit maximiser if it does not make a bid to maximise the present value of its profits at its chosen subjective discount rate. The capitalised value at every future date of all its plan projects must be > 0 and +ve. The rate of revenue increase should equal the rate of cost increase. As Stigler notes, ‘‘The future is never certain: it consists of an assortment of possibilities to which men attach anything from vague to fairly precise pro-

babilities.”’

Or, as Graaff comments,

the mists of the future, itis more

‘‘As the stream recedes into

and more

heavily discounted for

uncertainty.’’4° IX.

The Linear Homogeneous Production

Turning now to the study ofthe linear function (LHPF), we can write it thus: X==1,(A,.B). or!2x=f (2A, 2B).

or x=F(A..B). Multiplying either side by 4, we have

AX=F (AA.AB) «

Function

homogeneous production

128

Studies in Economic Analysis and Policy in Retrospect

Multiplying the quantity of each input by any (+) ve figure (either > or < than unity) will automatically multiply the output, x, by the same figure. Such a function is stated to be homogeneous of the first degree, i.e., linear and homogeneous.*! Its conditioning law is the law of constant returns to scale, which is at the same time consistent with diminishing returns to any one input or to all inputs. There is one and only one optimum input proportion which does not alter with the level of output of the firm.

The expansion path of a LHPFis a straight line passing through the origin because the proportions between A and B do not vary with the size or scale of output. The slope of curve x, at P in Fig.15 is the same as that of curve x, at Q, and soon. And the segments

OP, PQ and QR

are equal,

denoting

constant returns to

scale.4?

Expansion Path

B factor

0

factor A

FIG.

15

The characteristics of a LHP are the following: (1) The margi-nal product (MP) of a factor, labour or capital, varies only with changes in its quantity in relation to the other factor(s) employed alongwith it. MPA and MPB are (+-)ve and > 0 and are decreasing functions of the amounts of A and B employed. (2) The participat-. ing factors, A and B, are complementary such that an increase in A in isolation depresses its own MP but necessarily raises the MP” of B. (3) MPs and APs of all factors are invariant to the proportionate changes in ail factors together. Asa corollary, the joint MP of an extra amount of all factors together, assuming their proportions to be unchanged, equals the sum of the MPs of the factors added up separately. (4) The total product is exactly exhausted by payments made to the participating factors in accordance with their MPs. Put differently, if the elasticities of a production function estimated from the relative shares of the factors add up tothe total product, then that production function is linear and homogeneous ipso facto. This is the simple Euler’s Theorem on the:

Production Functions in Economic Analysis

129

Adding-Up Problem.’ In the Euler’s Theorem profit is zero. Wicksteed’s solution of this problem presumes constant returns not all over the range of production but at the point of tangency between the marginal and average cost curves at the latter’s minimum point. Wicksteed regarded the three laws of returns to scale as mutually exclusive alternatives, not as different phases of the longrun cost curve of a firm. (5) The elasticities of marginal cost and average cost are the same, that is, identical and constant. The LHPF assumes (i) that the factors of production are perfectly divisible, (ii) that their prices are constant to the firm inasmuch as they are in perfectly elastic supply, (iii) that there is perfect complementarity between the factors, (iv) that their quantities vary infinitesimally, and, finally, (v) that the coefficients between the factors are constant. Needless to say, these are pre-conditions of constant returns to scale. Constant returns to scale are not limited to the case of only two factors. Although we cannot have a visual image of a function involving more than three variables in all, a production function can be linear and homogeneous with any number of factors.44 Furthermore, as Walras and Wicksell pointed out,a LHPFis a sufficient but not a necessary condition for the exhaustion of the total product; it will be exhausted even when the production function is of any form. The assumptions of the LHPF enumerated above constitute also its limitations, The merits of a LHPF are: (a) Its specialisation and simplification and hence its susceptibility to the general theory of production, (b) Its accurate empirical approximation in diverse conditions, (c) Its applicability in distribution and production, input-output and linear programming analyses,** (d) The perfect determinancy of e, for such a function, assuming perfect competition and neutral technical change, and (e) The availability of some empirical evidence confirming that the production function for the economy as a whole is not too far from a LHPF.*®

X.

The Cobb-Douglas Production Function

The Cobb-Douglas Production Function (C—D PF), propounded in 1928, isa typical example of the LHPF and holds ‘‘an almost

monopolistic below:

position

in

economic

literature.’’?’

It is written

O=A.N.“K® , where

Q is Total Product.

A,

and § are parameters or +ve constants.

MP of N factor is always « times its average product (AP), MP ofK factor is always B times its (AP). « and 6 are exponents

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Studies in Economic Analysis and Policy in Retrospect

of labour and capital respectively in this production function and indicate the proportionate change in output for a given proportionate change in the factor, labour or capita]. They are but ratios of the MPs and APs of Nand K. N and K receive awards according to their MPs. « and 8 are equal to the relative shares of N and K. Their relative shares are not affected by their relative supplies. The

sum of « and

6, equalling

one,

governs

the degree

of homo-

geneity of this production function. e, jn this case is unity for any values of K and N and for any degree of returns to scale. For this reason alone the C-D PF is exceedingly popular with the econometricians. Its empirical foundation lies in the discovery of constancy of the relative shares of factors over long periods in the developed countries.*® The C-D PF assumes that (i) there are only two factors of production, namely, labour and (fixed) capital, (11) these factors are used with a constant degree of intensity, (iii) there is no change in the volume of working capital, (iv) there is no technical progress (or, better, there is only neutral technical change, or disembodied technical progress when all factors and the MRS between them

remain unaffected), and (v) the timeperiod is given.*® The merits of the C-D PF can now be listed: (a) Its popularity is not due to its ‘‘demonstrated utility as a description of actual production functions, however.’ ‘‘Rather, it is used because (1) it yields diminishing returns to each productive factor separately, (2) it is simple to handle, being linear in logarithmic form, (3) in many investigations the precise nature of returns to scale is not very interesting, and ccnstant returns is a convenient simplification, and (4) of a remarkable property of constant returns to scale.’

(b) It is the only PF which has a unit elasticity of substitution at all points, assuming first-degree homogeneity.*! (c) Its peculiarity is that the constant parameters to be estimated are themselves the elasticities that are also the relative shares of the factors.

This production function is criticised for its failure to determine the exponents of the two factors independently. Critics insinuate that it can be justified only if the supply of land remains constant during the period of observation. The use of a statistical index of fixed capital too is subject to criticism, for in conditions of excess capacity capital co-efficient becomes obscure. Another criticism

levelled against it is that its statement in terms of physical instead of value production renders the ‘day index’ woolly and loose. The ‘day index’ has an insecure logical foundation since it takes the patterns of production and income distribution to be constant. Its ‘statistical

foundation

is also

alleged to be shaky because even the

cross-sectional results that are achieved are vulnerable to the criticism of indeterminacy of multi-collinearity.5* The assumption of the

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relative constancy of factor shares made by it is being increasingly questioned now-a-days.*? Their ‘‘empirical results imply that elasticities of substitution

tend to be

less than one, which

contrasts

strongly with the Cobb-Douglas view of the world.’’®4 There are many exceptions to the generalisation from the studies of production functions from cross-sections of firms testifying to the accuracy of the Cobb-Douglas specification of the LHPF. These Observations do not trace a ‘representative’ production function. The least squares estimates may give seriously biased results because of the simultaneous equations form of the underlying model. Measuring some combination of the marginal product conditions or the Euler condition cannot be helped. Simultaneous identification methods have not so far been used abundantly with suitable safeguards.. Summing up these limitations of the C-D type production functions, Walters remarks, ‘‘The cross-section, inter-industry studies do not measure the production function and shed no light either on marginal productivity theory or on economies of scale.” He maintains that the planning models of a Leontief or linear programming tyre probably suffer more from incorrect specifications

of production error.

function

and progress

functions than from any other

Therefore, his advice is that ‘‘painstaking, detailed

research

into processes and innovations is the only answer.’’®

Another form of production function frequently used for statistical testing is the general constant-elasticity of substitution (CES) form. When the elasticity approaches unity, the CES function simplifies to the C-D from. When the elasticity approaches zero, the CES function becomes a Leontief-type input-output function. The CES function can be extended to incorporate many inputs, but, to be candid, it is not so simple an extension as in the case of the

C-D function.*® XI. An Over-all Critique of the Neo- Classical Production Function The neo-classical production function is supposed to depict the pure production aspect of an economy and the profit- maximising behaviour leading to marginal calculations gives a corresponding marginal productivity theory of distribution.” Professor Mrs. Joan Robinson is of the view that the dominance in the neo-classical economic teaching of the concept of a production function, in which the relative prices of the factors of production are demonstrated as a function of the ratio in which they are employed in a given state of technical knowledge, has had ‘‘an enervating effect upon the development of the subject” for the reason that by concentrating upon the question cf the proportions of factors it has ‘‘distracted attention from the more difficult but more rewarding questions of the influences governing the supplies of the factors and of the causes

and consequences of changes in technical knowledge’”’.°* According to her, the neo-classical production function comes to grief (even in

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the most perfect tranquillity) on account of its failure to distinguish between ‘capital’ in the sense of a means of production with particular technical characteristics and ‘capital’ in the sense of a command

over

finance,

when charged with the task of determining

the distribution of the product of industry between labour and capital.°® When required to analyse a process of accumulation, the neo-classical production function again comes to grief on account of its failure to distinguish between comparisons of (static) equilibrium positions and (quasi-dynamic) movements from one to another. Fifthly, Mrs. Robinson still insists that capital cannot be put into a production function from which, given the supplies of labour and land, under perfect-competition and profit-maximisation assumptions, the equilibrium rates of real wages, rent and profit may be deduced in terms oftheir marginal productivities. When this scheme is unworkable in a stationary state, it can hardly be sensible to hope that this can be retained in a dynamic model.®! She is emphatic that the neo-classical production function can _ be rescued only if we bring the Keynesian conditions to its aid. The equilibrium path of accumulation and distribution of income can then be traced out successfully.™ XII. Production Function And Distribution

The Euler’s Theorem brings cut that the relative shares of labour and capital vary in opposite directions. If the capital supply grows at a faster rate than the labour supply, the rental of capital would be falling and wages will be rising through time. But it is quite possible that the rental may fall gently, while wages may rise rapidly, whereupon the relative share of capital may decline. Also, given a production function, the ratio of their rewards per unit may change as a result of variations in the amount of accumulated capital in proportion to the labour force but their relative shares will not change.** But when there is neutral technical change (that is, when the marginal products of all factors change at the same rate), there relative shares will remain unchaged.*4

The problem will be difficult when there are diminishing or increasing re urns to scale. Then we could not be sure that an increase in the capital-labour ratio would cause the rental of capital to fall and the wage-rate to rise. The total product would either exceed or fall short of the sum of their distributive shares. Under diminishing returns to scale, assuming (a) fixed factors (s), the sum of market-imputed factor payments would be less than the value of aggregate output, leaving a residual to be earned by the fixed factor. On the other hand, under increasing returns to scale, assuming indivisible units of (a) factors (s), the total product is insufficient to reward all the contributing factors according to their marginal products. Some factor (s) must be earning less than its (their) marginal products (s). There is no mechanism to force the monopolist to pay the factors he hires according to their marginal

products.

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133

In addition, the Euler’s Theorem is aborted even as the production function is homogeneous if demand is sufficiently favourable and the total product will not be exhausted even under perfect competition.® Lastly, implicit in the contention that functional income distribution is wholly a matter of production function is the assumption of ‘‘a definite pattern of relationship between causes and effects in economic theory’; it is to assume that distribution 1s the direct outcome of production and the share of investment in the national product as well as other aggregates is consequently determined.” Hicks argues that only if marginal productivity is treated in the macro sense that it relies on the production function but for this “‘the existence of the production function must be established before the question of distribution by marginal productivity can arise.’’ This apart, ‘“‘the existence question is a different question according as it is taken in a static or a dynamic context.” The neo-classical production function serves the static context well. As capital increases, relatively to labour, the marginal productivity of capital (the rate of profit) will fall, and the real wage of labour will rise. The change in relative shares will depend on the elasticity

of substitution. But the neo-classical production function faces “‘major troubles’? when used in the dynamic theory for the obvious reason that formally valid as it may be, it yet lacks sophistication and measures capital in physical

terms

and

equates

its marginal

productivity with its net quasi-rent. In a dynamic production function it should equal the rate of profit. During the period of adjustment technology is changing (e.g., gradual or immediate informational diffusion, capital transmutation). The production function is continually shifting. All this permits a rise in production, even though Jabour and capital are constant. If production is is rising, capital must be rising. Were capital measured correctly, asserts Hicks, the technical improvement must culminate in a fall in the capital stock (i.e., a loss of value). A technical change has a

direct

effect

on

the

marginal

capital and in consequence, any

productivities of both labour and

sort

of redistribution

is possible,

concludes Hicks.* Solow regards the presentation of the marginal productivity theory of distribution, a fundamentally micro-economic theory, in

macroeconomic terms as ‘an act of empirical desperation.’®® The neo-classicals (comprising such economists as Samuelson, Meade and Solow) contend that the rejection by the neo-Keynesians (like Mrs.

Robinson, Kaldor and Pasinetti) in the recent

debate

of the

neo-classical concept of an aggregate production function does not ipso facto lead to the rejection of the marginal productivity theory of distribution as well. They believe that the wage-rate and the profit-rate are factor prices on an equal footing. They use the term ‘factor-price frontier’ in their writings. They justify the marginal apparatus. On the other hand, the neo-Keynesians point out that

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the neo-classical marginal productivity theory lacks a unit even under conditions of a stationary state in which a heterogeneous physical object like capital as a number could be measured independent of distrbutive shares and relative prices. They assert that it is impossible to conceive of a quantity of capital in general, the value of which is independent of the rates of interest (profit) and wages. This independence is essential if we are to construct the neoclassical iso-product curve. The slope of this curve plays a critical part in determining relative factor prices, and hence factor rewards and shares. However, the iso-product curve cannot be constructed and its slope cannot be measured unless the prices which it is intended to determine are known in advance. Besides, the value of the same physical capital and the slope of the iso-product curves vary with the rates chosen, which makes the construction untenable. Both double-switching (i.e., the possibility that the same technique may be the most profitable of all possible techniques at two or more separated values of the profit-rate even though the other techniques have been the most profitable at the profit-rates in between) and capital-reversing (i.e., the possibility of a positive relationship between the value of capital and the profit-rate) strike at the very roots of all versions of the neo-classical distribution theory. The neo-Keynesians destroy the underpinnings of the neo-classical demand curves for labour and capital at both industry and economy levels. They do not regard capital as a factor on the same footing as labour. They use terms like ‘wage-rate rate-of-profits trade-off’ and ‘wage-interest frontier’. They attack the marginal apparatus.” In fine, the very assumption in every production function of factor classification has only “limited validity’, as Dewey takes trouble to show.”!

References

—. G.J. Stigler, The Theory of Price, New York, 1968 (Sth printing), p. 106. 2. P.A. Samuelson, Economics: An Introductory Analysis, London, 1961

(5th ed.), pp. 570, 586.

3._C.E. Ferguson, The Neoclassical Cambridge, 1971, pp. 7-8.

Theory

of Production And Distribution,

4. R.G. Lipsey, Positive Economics, London, 1966 (2nd ed.,) ch. 20. 5. M. Fleming, Introduction To Economic Analysis, London 1970 (2nd

impres-

sion), p. 95

6. G. Debrue, Theory of Value, Yale, 1959, pp. 37-38, 43. 6a. T.C. Koopmans, Three Essays On The. State of Economic

York, 1957, p. 69.

Science,

New

7. J. de V. Graaff, Theoretical Welfare Economics, Cambridge, 1967, p. 15. 8. Ao Shackle, Expectation, Enterprise and Profit, London, 1970, pp. 51,

9. J.A. Schumpeter,

History

printing), pp. 1027-34.

of Economic

Analysis,

London,

1967

(6th

Production Functions in Economic Analysis

135

10. G.J. Stigler, op. cit., p. 117. 10 E.J. Nell, ‘Theories of Growth and Theories of Value’, Economic Deyelopment and Cultural Change, Vol. 16, 1967, pp. 15-26. 12% J. R. Hicks, Capital And Growth, Oxford, 1965, ch. 24. 1S: eee Baumol, Economic Thory and Operations Analysis, New Delhi, 1963, ch. 9. 14. M. Bronfenbrenner, Income Distribution Theory, Macmillan, 1971, ch. 6. iS: V.L. Smith’s article in International Encyclopaedia of Social Sciences, Volexily paoie. 16. G.J. Stigler, op. cit., pp. 107-09. a. C.E. Ferguson, op. cit., p. 92. 18. M. Blaug, Economic Theory in Retrospect, Loadon, 1963 (2nd ed.}, pp. 451-7. 18a.

T.C. Koopmans, op. cit. 19. J.A. Schumpeter, op. cit., p. 1029. 19a. T.C. Koopmans, op. cit., pp. 69-70.

20. K.E. Boulding, Economic Analysis, London, 1955 (3rd ed.) p. 741. 21. W.J. Baumol, op. cit., chs. 8 & 9. 22) T. Scitovsky, Welfare And Competition, London, 1968 (6th impression)

pperitss125 feibid=ps 115; . . . . . .

W. Fellner, Modern Economic Analysis, Tokyo, 1960, p. 266, J.A. Schumpeter, op. cit,, p. 1030. G.J. Stigler, op..cit, pp. 107-09. K.E. Boulding, op. cit., pp. 745-9, 752-67, J.R. Hicks, Value And Capital, London, 1972 (2nd impression), ch. 6. K.E. Boulding, op. cit. p. 766.

. M. Bronfenbrenner, op., cit., ch. 6. . K.E. Boulding, op. cit., p. 743,

. V.L.

Smith’s

article

in

/nternational

Encyclopaedia

of Social

Sciences,

Vol. XII, p. 514. . T. Scitovsky, op. cit., pp, 116-117. . G.L.S. Shackle (ed.), A New Prospect of Economics, Liverpool], 1959, p. 86. . J.R. Hicks, Value And Capital, op. cit,

. N. Kaldor, Essays

on Value And Distribution, London,

1960, ch. 2.

. H. Myint, Theories of Welfare Economics, London, 1948, pp. 108-09. . K.E. Boulding, op, cit, ch. 26. . M. Kalecki ‘‘The Principle of Increasing Risk’’, Economica, Vol. IV, 1937,, pp. 440-447; T. Scitosky ‘‘A Note on Profit Maximisation and Its: Implications,’ Review of Economic Studies, Vol, XI, 1943, pp. 57-60; and! K.E. Boulding, op. cit., chs. 26 & 39. . J. de V. Graaff, op. cit,, ch. 6. Also, W.G. Baumol, Economic Dynamics, Tokyo, 1959, ch. 5 and A. Silbertson, ‘‘Price Behaviour of firms’’, Economic Journal, Vol. 80, 1970, pp. 511-582. . R.G.D. Allen, Mathematical Analysis For Economics, London, 1950,

pp. 315-320.

42. W.J. Baumol, op. cit., ch. 9. 43. A.W. Stonier and D.C. Hague, A Textbook of Economic 1972 (4th ed.), pp. 371=72.

Theory,

London,

Studies in Economic Analysis and Policy in Retrospect . G.L.S, Shackle, Expectation, Enterprise and Profit, op. cit., pp. 59-60. . C.E. Ferguson, op. cit., p. 93. . W.J. Baumol, op. cit., ch. 9.

. G.J. Stigler, op. cit., p. 151. . P.A. Samuelson, op. cit., pp. 571-2. . P. Davidson, Theories of Aggregate Income Distribution, New Jersey, 1960, ch. 4. . G.J Stigler, op. cit., p. 151. . MLW. Reder, ‘Alternative Theories of Labour’s Share” in M. Abramovitz (ed.), The Allocation of Economic Resources, California. 1959, . P. Davidson, op. cit., ch. 4. . M. Blaug, op. cit. . K.J. Arrow et al, ‘‘Cupital-Labour Substitution and Economic Efficiency’’, Review of Economics and Statistic, Vol. 43, 1961, pp. 225-34, 246-8. A.A. Walter’s article in International Encyclopaedia of Social Sciences,

Vol. XII, pp. 520-523. « DIG-s Deed DOF . A. Bhaduri, ‘‘On the Significance of Recent Controversies on Capital Theory: A Marxian View’’, Economic Journal, Vol. 29, 1969, pp. 532-9. . Joan Robinson, ‘‘The Production Function and the Theory of Capital’, Review of Economic Studies, Vol 21, 1953-4, pp. 81-106.

. thid. . ibid. . T.W.

Swan,

‘‘Economic

Growth

and

Capital

Accumulation’,

Economic

Record, Vol. 32, 1956, pp. 343-61.

. Joan Robinson, op. cit. . M. Blaug, op. cit. . J. M. Marchal and B. Ducros (eds,), The Distribution Edinburgh, 1968, Jntroduction, pp. xiii-xxx.

. M. Blaug, op. cit. . P.A. Samuelson, Foundation of Economic Analysis, ae 1947, pp. 57-58.

of National

Cambridge,

Income,

Massachu-

J. Marchal and B. Ducros (eds), op. cit. . J.R. Hicks, Capital and Growth op. cit., ch, 24 . R.M. Solow, ‘‘Distribution in the Long And Short Run’? in J, Marchal & B. Ducros (eds.), op. cit., pp. 449-50. . G.C. Harcourt, Some Cambridge Controversies in the Theory of Capital,

C.U.P., 1972, pp. 8-9, 20-21, 118-119. . D. Dewey Modern Capital Theory, New York, 1965, p. 143.

CHAFTER

EIGHT

Value Approach in the Classical Theory of Distribution: A Stock—taking It is often alleged that there exists ‘‘a great gap’’ in the classical economics owing to the lack of integration between its theory of value and its theory of distribution’; that there was no theory of distribution as such up to 1870?; that the theory of distribution was not absorbed into the general theory of value; that the theory of distribution was not an extension or a constituent part of the theory of value and the rewards of the factors of production were treated as incomes, and not as prices;® that there is no provision of a single universal key in the classical economics to the understanding of the pricing problem in relation to commodities and factors;* that the classicists base their theory of value on one set of premises and their theory of distribution on other sets of premises, which fact increases the complexity of their explanations;® that they do not make use of the maxim of Occam’s Razor;* that their economics is conspicuous by the absence of a single principle applicable to both product and factor markets;’? that value and distribution are not interwoven in the classical economic thought;® that there is no logical unification between value and distribution in it®; and so on. In the classical distribution theory the rates of reward of the three factors of production are in turn explained by special theories. The rent of land is determined as a differential surplus over the marginal cost of cultivation. Wages of Jabour are said to be governed by the long-run cost of its subsistence. The rate of profit on capital is treated as a residual element. Thus only in the case of Jabour is the problem solved by the straight-forward application of the value theory.!° The classical distribution theory is thus ‘‘a compound of three separate theories.’’!! The tenuous ties between value and distribution theories stand dissolved—no marriage between the two is formalised.

I According to an author, in the classical economics distribution and value (which term is used interchangeably with the other term “exchange’) are treated separately from production. Production plays the primary part in determining the size of the national dividend. It depends wholly on technology and the laws of changes

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in the supply of factors of production.!? But, according to others, exchange relationships are regarded by the classicals as being essentially determined by the facts of production.** The distribution of income is determined first within the process of production as such and it then determines the costs of production of the different

products which,

in turn,

determine their long-run normal

values.14 The problem of distribution stood in the foreground of interest displayed by the classics, who followed Adam Smith. Value and distribution constituted the central core oftheir analysis despite their attempt at the concealment of their objects under other names.!®

The

problem of distribution supplied, under the surface,

heat to the tepid question of value.!® The real aim of the classical economists was to explain the division of wealth among the economic classes of the community; and if doing this involved an account of the value of the factors of production, that was no more than a by-product.*? Many historians of economic doctrines have argued that there is not in the classical theory of distribution the value or pricing approach. For example, Bell notes that the classicists never considered distribution as a problem of vaiue.’® Stigler accuses them of their failure to develop a general theory of pricing of productive services.!® He considers this failure to be their ‘‘fundamental defect’? and ‘‘the major hiatus’? in their structure. The question of imputing a given produce to the resources which co-operated in its production was never faced by them. Spiegel asserts that the connections between value and distribution analyses were ‘‘loose”’ in their writings..° Spengler and Allen comment in their editorial note that until the marginal revolution of the 1870’s the distribution theory was not looked upon as an integral or inseparable part of

the price theory.?! Knight complains that the classicals did not approach the problem of distribution as a problem of valuation at all.°? But,

as

different line.

distinct

from

these

historians,

He contends that some

Schumpeter

takes a

classicals, such as Smith and

Mill, sponsored, to a degree, the view that the problem of income formation could be conceived of as a problem in the valuation or pricing of productive services. Several French, German and Italian economists more or less accepted this view. Say, Ferra and Malthus were notable among the builders of the demand and supply apparatus. This apparatus was acquired and slowly perfected during 1790-1870. It could have unified all purely economic problems. But partly due to the short-comings of their ground-work these writers never realized its possibilities to the full. So very great was the success of Ricardo that even those economists, who adopted Say’s schema in other respects, inserted into it a treatment of rent identical with his, without betraying ‘‘any symptom of logical discomfort” for the simple reason that the rent phenomenon could not

be explained in terms of the demand and supply approach.?3

Value Approach in the Classical Theory of Distribution

139

Although there is no unanimity of opinion among the classicals either on the determination of or on the method of realization of the distribution of the national dividend that may justify the use of the expression “‘the classical theory of distribution’’, yet since there is ‘‘a plan of distribution composed of the residue from their several theories’, which yields the impression of there being some degree of unity or cohesiveness in it, we can legitimately use this expression in discussing our problem.*4 Broadly speaking, this theory is identified with the investigations of the causes which affect rent, wages and profit. It examines the problem of proportional distribution of the national product which is taken as given. Absolute changes in the national product are reckoned with only casually and are assumed to be independent of the mode of its distribution.*® The mode of distribution is assumed to be controlled by natural forces. It is deemed to be ‘‘more than just a matter of the price system’s work.’ In other words, whilst the production of national dividend is judged to be largely independent of the equilibrium process of the market, its apportionment among the different classes is held to be governed by the processes of distribution and exchange.*” So far as the methodology is concerned, the account of distribution links up macro-economic analysis with a sort of historical macro-dynamics,® It is argued by a good many authors that as the classical theory of value was almost entirely a supply theory, so the theory of distribution which accompanied it paid but little and scant attention to the demand side.?® The influence of demand on the prices of factors was not duly recognised.*° The classicals took the demand side as unimportant and never endeavoured to go behind demand to ‘the more fundamental subjective valuations” that underlay it. They moved all the while in the world of goods without enquiring further their significance to the individuals.44_ They saw no relationship between utility and demand, utility and price, on the other.*®

on the one hand,** and between They dismissed the demand and

supply explanation of relative prices as superficial. The law of demand and supply is considered to be one of the axioms of the classical political economy, the quid inconcussum.*4 But only the short-term or market values were explained by this law. Market values were conceived of as variations from or fluctuations above and below natural values. There was perfect awareness of the fact that an equation of demand and supply might be effected at many points below or above the natural level. The law of demand and supply was employed with varying degrees of precision by the classical economists. But the forces lying behind demand and supply were not analyzed in such a manner as to reveal the ultimate causes, which were sought in natural value, without appreciating that there was anything else to be explained in market values apart from the fluctuations about the norm of natural values.*> The classics failed to appreciate that demand and supply

were just the channels through which the ultimate

causes like utility

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and cost operated. Whatever regulated value did so via its effect upon demand and supply.?* This law was an excellent instance of “circular reasoning.” It explained the variations of value but failed to illuminate the conception of value itself because price, demand and supply were like three sections of one mechanism, none of which could move in isolation and as such the real problem was how to determine their mutuality and inter-dependence.*’

I Chapters 8 to 11 of the Wealth of Nations®®* of Smith touch upon **the circumstances which naturally determine” the rate of wages and the rate of profit and “‘regulate” the rent of land. It is Smith’s concern

to examine the causes of variations in average factor prices,

that is, factor prices per unit. This is the problem of ‘‘pseudodistribution”, as Cannan chooses to call it.2® The manner of distribution of the national product forms the main part of Book One. Its discussion leads to the conclusion that, notwithstanding the obvious inequalities, the free play of enlightened self-interest and the natural law does culminate in greater abundance for all belonging

to

the

commonwealth

of Jand-owners,

workers

and

capitalists. But these chapters had a mixed reception at the hands of the critics. For example, Jan st. Lewinski applauds Smith for laying the foundation of the distribution theory but criticises him for postulating ‘‘different, quite opposed theories’ and for ‘‘not developing any one of them so as to give a satisfactory answer.’’4° Schumpeter expresses his satisfaction over the fact that Smith’s distribution theory was handed down to the nineteenth century through the eighteenth.4! In Blaug’s opinion the Wealth of Nations contains ‘‘a solid core of the distribution theory.’42 Oser upholds Smith’s distribution theory as ‘‘a systematic and comprehensive theory”’ based, in part, on the theory of the physiocrats but being, in essence, “‘far superior to it.’’4% This theory later became ‘‘the kernel of Ricardian economics.44 Even Say had regarded it as one of Smith’s best claims to fame. On the other hand, his chapters on distribution are also held to be ‘fan addendum ‘to’’ those on value consequent upon his contact with the physiocrats (Bell, op. cit., p. 174), ‘‘a mere appendage to’? (J.W. McConnell, The Basic Teachings of the Great Economists, Philadelphia, 1947 reprint, p. 217.) or ‘‘a corollary of” his doctrine of prices (Cannan, op. cit., p. 186), “a kind of afterthought”’ to his ‘‘original intention to deal only with production” and ‘‘altogether inferior to his handling of production” and ‘“‘marred by hesitations and uncertainties’? (st. Lewinski, op. cit., p. 97), “less well-developed and less

theory” (Bell, op. cit.), ‘‘inconsistent and

acceptable

than his value

incomplete’? (Haney, op.

cit., p. 291), and so forth.

Say considers value to be the object of distribution and seeks to ascertain “‘the laws which regulate the distribution of value’ in his Traite. T.R, Malthus implies by distribution a part of production.

Value Approach in the Classical Theory of Distribution

141

In his exposition we have scarcely a hint that distribution is the division of the product among the different classes of society. In his Principles of Political Economy distribution is taken to connote distribution of the product over the country to the consumers. He urges that a proportionate increase of wealth cannot be brought about by the powers of production alone but requires also an ‘affectual demand’ which is promoted by such a distribution of the product as would result in an increased value.*®

In the Preface to his book David Ricardo wrote: ‘‘To determine the laws which regulate this distribution isthe principal problem in political economy.’’*® In his oft-quoted letter to Malthus he wrote, ‘Political economy, you think, is an enquiry into the nature and causes of wealth; I think it should rather be called an enquiry into the laws which determine the division of the product ofindustry amongst the classes who concur in its formation.” In his equally oft-quoted letter to McCulloch he wrote, ‘‘After all, the great problem of rent, of wages, or of profits might be elucidated by determining the proportions in which the total product is distributed between the landowners, the capitalists, and the workers,

not necessarily connected with the doctrine of value.’’

distribution of ‘‘the

produce of the earth”

but this is

He spoke of

as a process of distribu-

tion between ‘“‘three classes of the community.’’*? He branded the enquiry into the nature and causes of wealth as ‘‘vain and delusive.”’ He regretted that the laws of distribution had not been adequately explained by Smith and Say

and others.

Their writings, according

to him, afforded ‘‘very little satisfactory information respecting the natural course of rent, profit, and wages.’’ But he conceded that Malthus had given the world ‘“‘the true doctrine of rent”, which must be comprehended in order to ‘‘understand the effects of the progress of wealth on profits and wages.” Ricardo was chiefly concerned with what Cannan decides to call ‘Distribution Proper.”’ So very successful was _ his distribution theory that it soon became ‘“‘the focus of economic theory.’’4% Marx eulogised him for getting near the truth by making distribution, rather than production, the subject-matter of political economy but ‘denounced him for his error in thinking that the laws of distribution were natural, and not historical.*® Ricardo’s work, according to st. Lewinski, was characterized by ‘‘a large perspective.”

He

embraced

‘‘the whole problem of distribution in one system” in a manner unrivalled before or after. His was the last attempt during the long run of years dominated by classicism ‘‘to investigate how changes of the component parts of the revenue of a country mutually affect each other.’®® But he is also charged by the critics for his wild generalisation and heroic abstraction, with leaving the task he set

upon himself unfulfilled, for not unifying or co-ordinating the three separate theories of factorial rewards, and with deserting his distribution theory in a state of incompleteness. As Cannan puts it succinctly, Ricardo always appeared to be treating a farm asa kind or type of the industry of the whole country and to suppose

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that the division of the entire produce could be easily inferred from the distribution on a farm.®! st. Lewinski insinuates that while writing his Principles Ricardo looked through the spectacles of the City banker. ‘‘In investigating the laws of distribution he looks at the economic phenomena from the windows of his estate in Gloucestershire (Gatcomb Park) seeing only the three classes which figure in agricultural production. Here is the field of his observations relating to the theory of distribution. Only after having taken this into account may we understand his theories concerning rent, profit and wages.’®* Gray doubts that he accomplished at all the task of determining the proportions of the various claims made on the national dividend.®* Spiegel laments that he failed to handle distribution ‘‘as a single issue susceptible to a single resolution.’’*4 His theory is adjudged to be incomplete since it is not supplemented by a fully developed theory of demand for products, short of which the setting of the margin of cultivation cannot be said to be deter-

minate.®® John Stuart Mill emphasized the distinction drawn previously by Senior between the laws of production and those of distribution: “‘The laws and conditions of the Production of wealth partake of the character of physical truths. There is nothing optional or arbitrary in them... It is not so with the Distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like... The Distribution of wealth, therefore, depends on the laws and customs of society.’°* By drawing a distinction between laws of production and laws of distribution Mill meant, not that the pricing of factors of production (i.e., functional distribution, as it is termed in modern economic usage) is independent of the technical conditions of production but that personal distribution of income among ‘‘the three main classes of society’? is influenced by the distribution of property, which itself is the product of historical

change. This distinction became one of the chief props or planks of Mill’s thinking, reconciling the ideas of Ricardo and Malthus with his own reform proposals.” Mill did not imply that the distribution of wealth is arbitrary and not subject to laws but instead he merely implied that its laws might be altered by human action. Once rules and regulations for the distribution of wealth are established, their consequences ‘‘are as little arbitrary and have as much the character of physical laws, as the laws of production... society can subject the distribution of wealth to whatever rules it thinks best; but what practical laws will flew from the operation of those rules, must be discovered, like any other physical or mental truths, by observation and reasoning.’’*’ Méill’s concept of distribution has three salient features, viz., (1) Certain supporting postulates, namely, the institution of private property, conflict between custom and competition, or rather the extent to which competition prevails over custom. Custom may be as important as competition in determining distribution. (2) Differences between the laws that

Value Approach in the Classical Theory of Distribution

143

govern production and those that govern distribution. (This has been elaborated in the foregoing paragraph.) (3) Influence of exchange and social progress on distribution. These features, in their final analysis, reduce to a synthesis or distillate of the views of Ricardo and Senior.

III Smith

distinguished

between

short-term

market

mined pre-eminently by supply and demand natural value determined by cost of production. fluctuate above and below natural values. Market ‘continue at variance with natural values for long

value deter-

and long-term Market values values cannot since a kind of

magnetism inherent in the forces of the economic order itself tends to pull them together. However, monopolies and natural causes (i.e., ‘‘circumstances which naturally determine’) may permanently or temporarily, as the case may be, sustain market values above natural values. Smith describes natural values as the ‘‘centre of repose and continuance.” To reproduce Smith’s words: ‘‘The natural price, therefore, 1s, as it were, the central piece to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a great deal. above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this centre of repose and continuance, they are constantly tending towards it. The whole quantity of industry annually employed in order to bring any commodity to market, naturally suits itself in this manner to the effectual demand. It naturally aims at bringing

always that precise quantity thither which may be sufficient to supply, and no more than supply that demand.’*® Smith is here thinking of demand and supply as referring to the people’s willingness to buy or sell at a particular price rather than at all possible prices. The former is expressed in actual amounts desired or offered, whilst the latter is expressed in a schedule of amounts, each corresponding to a different price. Besides, the Smithian concept of a natural price is not determinate. It appears as a long-run average of market prices. There is no analysis of the causes of forces determining it.*! Say replaced the classical labour theory of value with the demand and supply theory. He evinced a clear understanding of the inter-relations of demand, supply and price. He distinguished between supply and stock.

Malthus fostered the demand and supply approach: ‘Of all the principles of political economy there is none which bears so large a share in the phenomena which come under its consideration as the principles of supply and demand.’’ The relationship between demand, supply and price is seen plainly and concretely by him: ‘‘When prices are said to be determined by demand and supply, it is not meant that they are determined either by the demand alone. or the supply alone, but by their relation to each other.’”’

Moreover,

“Jabour

cost

has a powerful

effect upon

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prices” by regulating supply. However, in actual exchange ‘‘no circumstance affects it but the relation of the supply to the demand.’” Malthus enunciates at great length the manner in which ‘‘the great principle of demand and supply is called into action to determine what Adam Smith calls natural prices as well as market prices.” Malthus insists that the interaction of demand and supply is ‘‘paramount at every point in the pricing process.’’®- This insistence had its far-reaching impact on causing the phrase ‘‘demand and supply’” to be used ‘‘with a sense of criticism or impatience’’ because ‘‘it seemed to imply that hard conditions were unavo:dable.’’® Ricardo believes firmly that the law of demand and supply only regulates price occasionally and temporarily. Throughout chapter 30 of his Principles he speaks of demand and supply not as schedules but as quantities actually bought and sold. He ignores the short run completely and rules out market value as non-essential and deals with normal value exclusively. Normal value is regulated by cost of production. For any commodity to have exchange value utility is essential but price bears no relation to the degree of utility that a commodity possesses. Utility is thus pushed out of the picture. Demand has no influence on price because it has no influence on cost of production which determines normal value. The demand and supply analysis is irrelevant to the ‘‘fundamental” determinant

of value,

i.e., cost

of production.

Ricardo

has

no

patience for this sort of analysis since with the exception of wheat (‘corn’) all goods are assumed to be produced under conditions of constant costs. Chapter 30 creates in the reader’s mind the impression that cost is something separate from demand and supply, though in his Notes On Malthus he does admit that ultimately supply will be determined by natural price, t at is to say, by cost of production. In order to prove that natural price cannot be explained simply by demand and supply he postulates the case in which, in modern terminology, a perfectly inelastic demand curve intersects a perfectly elastic supply curve. When the supply curve shifts downward, price falls, whereas the quantity bought and sold remains the same. He also concludes that when increase of demand is followed by increase of supply, demand ceases to exercise any influence On price. Say and Malthus tried in vain to open his eyes on these points.*4 Robbins has taken sufficient pains to show that Ricardo has been wrongly misunderstood on this aspect of the problem. He argues tenaciously that it is ‘‘untrue’’ to assert that Ricardo repudiated supply and demand as being but short-term influences. The idea that while Ricardo accepted supply and demand governing market values, he ignored their operation in the determination of natural values is, to Robbins, ‘‘a complete mare’s nest despite the very high authority from Senior onwards by which it has been supported.’’ Robbins shows how, in fact, Ricardo assumed throughout that ‘tthe long-term influences worked through the forces of the market’’ and he said so in his reply to Malthus: *‘Mr Malthus mistakes the question—I do not say that the value of a commodity

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145

will always conform to its natural value without an additional supply, but I say that the cost of production regulates the price.”’ According to Robbins, Ricardo’s conception of the determination of price at the margin of agricultural production implied demand as a factor co-ordinate with cost of production. ‘“‘But’’, adds Robbins, ‘‘although from time to time there are hints of varying elasticities, we may search in vain for any clear-cut presentation of amount demanded as related to price.”’ Ricardo has to blame himself for the misunderstanding which has arisen in this respect. He wrote a whole chapter against the supply and demand theory without defining more explicitly and precisely wherein lay the true nature

of his opposition,.® Ricrado assumed that labour and capital were combined in fixed proportions. Accordingly, shifts indemand from one to the other could be ex hypothesi ignored. ‘‘Even then his ingenious power of reasoning broke through to an analysis of the causes of demand and supply of factors of production and hence of the forces that deter-

mined

distribution.’’®*

But this

‘‘break-through”

was inadequate,

and, on the whole, there is no perception of the fact that the producers ‘‘demand for the factors is derived from the consumers’

demand for the products’’.® In the absence of a demand for products the setting of the margin of cultivation itself remains foggy or

nebulous, non-descript or indeterminate.® N.W. Senior makes the exchange value of goods rest on their demand and supply. Unlike his predecessors, he accords utility a place of great significance in this analysis. The labour theory is rejected. Thecost of production theory is propounded and the productivity of capital is assigned its proper place in it. Cost of production is not taken to denote a point to which price is rigidly attached. On the contrary, it is taken to indicate a centre of oscillation which price is always striving to approach. The scarcity aspect of supply is stressed. But in the end we are left without a subjective theory of value.®

Mill classified goods into three categories, viz., (1) Goods which are absolutely limited in quantity and whose value is regulated solely by demand. (2) Goods whose production can be exranded without limit at constant cost per unit of output, their natural value being governed by supply or cost of production. (3) Goods which can be produced in a limited quantity and which obey the law of diminishing returns, their natural value being determined by the marginal cost of production. A commodity will fetch only that value which ‘‘gives a demand just sufficient to carry off the existing or expected supply.” Price is fixed at a margin where the quantity offered is equal to the quantity demanded. Under a regime of free competition all price variations tend towards this margin or point as “the sea tends to a level; but it never is at one exact level.’ Mill’s natural value is governed by cost of production which works through the vehicle of supply. Some attention is paid to utility, and demand

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is made, to some extent, co-ordinate with supply. But this idea is not developed in all its ramifications and no bold thrust towards the subjective theory is in evidence. As a critic remarks, ‘‘The implication of Mill’s theory, if it had been followed up, would have opened up the whole vista of demand approach to the theory of value. But the cost approach of the Jabour theory outlook was too strong for such a follow-up.’ Also, there hangs over the entire treatment an aura of ambivalence or ambiguity. At one place, Mill speaks of the law of demand and supply asa ‘law anterior to cost of production.”? At another, he holds the ‘‘aprarently mathematically precise formula (i.e., the law of value or the law of demand and supply)” to be ‘‘merely a vicious circle.” Ata third, complete satisfaction with this law is expressed: ‘‘Happily, there is nothing in the law of value which remains for the present or any future writer to clear up; the theory of the subject is complete.” Méill failed to demonstrate that the law of demand is perfectly general and embraces within its ambit also the first two classes of goods. However, he upheld beyond all shades of doubt the proposition that the zero elasticity of supply was a phenomenon of the short run, while constant costs typically occurred in the long run.?! Furthermore, by substituting the conception of equilibrium for the causal relation he introduced into economic analysis a new—fangled principle which was destined to lead subequently to some important modifications.” J.E. Cairnes made a ‘‘very significant’? analysis of demand and supply in his book.’ Great emphasis is laid on the distinction between aggregate demand and supply, on the one hand, and demand and supply of a particular commodity, on the other. Market

value is made to hinge on the interplay of demand and supply; normal value wholly on cost of production.”* The law of demand and supply is stated in the following words: ‘‘The supply of a commodity always tends to adapt itself to the demand at the normal price.” Supply and demand in relation to prices are spoken of as ‘‘merely proximate agencies governing the fluctuations of the market, but themselves controlled by forces lying deeper in the economy of

production.” IV

There is ample evidence in the inter-connections between the theory distribution.

Smith’s

explanation

Wealth of Nations of the of value and the theory of

of value

in terms

of costs

of

production is said to serve well ‘‘as an avenue both to the theory of equilibrium price and to the theory of distribution.”’> The three com-

ponents of cost of production are the ‘‘original sources of all revenue as well as of all exchangeable value.’ The three-fold classification of the social product playsa double role, being used, firstly, for the explanation of price and, secondly, for that of distribution.”®

Buchanan

exhibits

how

theory of distribution.”

Smith

made

Spann labours

his theory hard

of prices

to drive

into a

home

the

Value Approach in the Classical Theory of Distribution

147

point that in the Smithian system ‘“‘the laws of prices are also the laws of distribution” and ‘‘the theory of distribution is developed as a theory of particular prices.”’ The taws of prices have the last word as to whether this commodity or any other commodity shall be produced, and insofar as prices dictate who among the consumers will purchase them, the laws of prices decide at the same time how goods shall he distributed. On this view, Smith’s system is not a theory of production but a theory of the formal Jaws of value and price which, according to him, determine production just as

much as distribution.*®

The connecting link between the equilibrium

in the consumers’ market and that in producers’ market supplied by Smith is the price of a commodity which equates its market demand with its market supply, and which also gravitates towards its natural price. This natural price is equal to its cost of production comprising the natural rates of earnings of the factors employed.”® The earnings of the factors (i.e., their net advantages) tend, in equilibrium, to be equal in all industries. But Smith makes no attempt to throw light upon what determines the rates of those earnings. These natural rates of factorial earnings simply appear to be the

long-term averages of the prevailing market rates.°° Say believed that it was the productivity of each of ne factors engaged in production as regulated by the law of demand and supply which eventually determined the return each unit of the factors received. According to him, ‘‘the market value of the productive factors is established on the same principle as the value of all other things, that is to say, in proportion to the supply and demand. ‘*The value of the services, like that of everything else, always rises directly with demand and inversely with supply.” Both production and distribution boil down to an exchange of services. Say’s theory of distribution is on all fours with his theory of exchange and production.*! He gave the first ever indications of the nexus between the value of products and the derived value of factors. He regarded the prices of all factors as dependent on those of their products, and hence onthe consumers’ demand. The demand for factors is in this way connected with that for their products. “Entrepreneurs are the intermediaries who demand the productive services required for any product in relation to the demand for the product.” S

As mentioned above, in his letter to McCulloch Ricardo denied the problem of distribution was ‘‘necessarily’’ connected with the doctrine of value. To Ricardo, the entire problem of value was secondary to the question of distribution, 82 and his discussion of value is subsidiary to his discussion of distribution.*? To quote Kaldor, Ricardo’s ‘“‘concern in the problem of distribution was not due, or not only due. to the interest in the question of distributive shares per se, but to the belief that the theory of distribution held the key to an understanding of the whole mechanism of the economic systenmni7 4 that

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A number of authors point out how Ricardo treats value separately from distribution (Newman, op. cit.); how there is no integration between his value and distribution theories (Lekachman, op.cit., p.105); how to him distribution is not primarily a question of prices (Catherwood, op.cit., p.97); and so on. But a greater number of them point out how his value analysis constitutes a logical link in his chain of reasoning about distribution (Clark, op. cit.); how he deduces his value theory from his laws of distribution (Gide and Rist, op.cit , p.150); how he brings his distribution theory into relation with his value theory and how his coming to grips with the problem of distribution correlates the values of products with the incomes of producers (Haney, op.cit., p.291); how he conceives of distribution as a consequence of prices (Spann, op.cit., p.146); how value and distributicn are closely and constantly related in his views (McConnell, op.cit., p.219); how he extends the application of the price system far into the field of distribution (Haney, op. cit., p.292); how his labour theory of value, despite its ostensible flaws, provides a convenient short-cut for expounding the real nature of distribution in a growing economy and how his entire teaching (distribution included) has the theory of value as its fulcrum and how his distribution laws are inferred from his value Jaws [ which contrasts sharply with the veiw of Gide and Rist noted above (Spann, op.cit., p.142)]; how he heralds and foreshadows the synthesis of value and distribution theories which emerged almost fifty-four years Jater from the writings of the Austrian Trio (Spiegel, op.cit., pp.318, 323); how his basic theorem on distribution turns strictly on his measure of value and how in his synthesis of the theories of population and rent into a general theory of value and distribution he struck out his own (Stigler’s paper reprinted in Spengler and Allen, op.cit., pp. 421, 423); and so forth. Senior regards exchange as the agency of distribution and distribution as an exchange problem. Miéill’s approach to the problem is confused: In Book One of the Principles distribution is tackled without reference to value. But in Book Three Mill attempts to dovetail and inter-relate the tuo but his achievement in this area is both imperfect and desultory. It is eroded by the dichotomy between produc.ion and distribution, for distribution being a product of historical accident has nothing to do with valuation. Cairnes maintains that the laws cf value solve also the problems of relative wages and profits, which follow the same laws as govern the exchange values of commodities. He seeks to tag an analysis of average absolute wages, profits, etc.,on to his analysis of relative distribution. Thus a sizable chunk of the writings of the later classics harmonizes their value and distribution approaches,

V Our above critique of the classical theory of distribution casts serious doubt on the validity of the common allegation made against it that it is devoid of all connection with the class'cal theory

Value Approach in the Classical Theory of Distribution

149

of value. Those who subscribe to this view do so by a long sweep of generalisation. They refuse to go into the contributions of each of the distinguished classicists to the two theories and instead take those of any particular classicist to be the crowning symbol of the school as a whole.

But this conclusion is not intended to

deny the

implied accusation that the attempt made by the individual classicists at the extension of the value theery to the distribution problem lacks sharpness and poignancy and is marred acutely by vacillation, hesitancy and inconsistency. However, this defect cannot be taken to be the result of the classicists’ complete ignorance of the close affinity existing between the two theories. It is the product of their unconscious neglect of, rather than of any doctrinaire prejudice against, this affinity. The individual writings of the classical economists are abundantly interspersed with such innuendoes, overtones and suggestions as bear directly on the threshold connecting their value explanation with their distribution explanation. There is present in them a grasp and an understanding, loose or incoherent or inarticulate as it may be, of a one-all rule governing value as well as distribution. In support of this conclusion we can do no better than quote the following passage from Fraser: ‘‘Their explanation of the forces determining the level of incomes was closely relevant, as they were fully aware, to their analysis of commodity values; for the cost of production theory of value is obviously empty and meaningless if it does not include some explanation of how the market prices of productive resources are determined. Not merely this, but the classical economists themselves took the view

that the best way of solving the problem of personal distribution was to relate the income a man received to the amount of the resources he offered for use in production. And they therefore discussed property incomes in terms of rent per acre or of profit per cent of capital invested, and labour incomes in terms .of wages per unit of labour power. It followed that their results were, at least to some extent, theories of the value of land, capital, and labour, no less than of the incomes of landlords, capitalists, and

workers. Nevertheless, the emphasis was on the personal rather than on the value aspect of the problem. Their real aim was to explain the division of wealth among the community’s economic classes; and if doing this involved an account of the ‘value’ of ‘factors of production’, that was no more than a by-product.’’®* The classical distribution theory embodies the value approach, even if it is tangential or peripheral. References 1. See G.J. Stigler’s paper in J.J. Spengler & W.R. Allen (eds.), Essays In Economic Thought, Chicago, 1960, p. 534. 2. G.J. Stigler, Production And Distribution Theories, New York, 1948, p. 2. 3. L.M.

Fraser,

Economic

Thought

And

Language,

London,

1937, pp. 344,

349, 373. 4. J.A. Schumpeter, History of Economic Analysis, London, 1967 (6th printing), pp 913-916 and R. .Lekachman, A History of Economic Ideas, Delhi, 1967, p. 165.

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150

5. D.R. Fusfeld, The Age Of The Economist, Ulinois, 1966, p. 82.

6. R.H. Barback, The Pricing Of Manufactures, London, 1964, p. 2. 7. G.L.S. Shackle, The Nature Of Economic Thought, Cambridge, 1966, p. 64. 8. L.H. Haney, History Of Economic Thought, New York, 1936 (3rd ed.)

p. 642. 9. H. Taylor, A History Of Economic Thought, Tokyo, 1960 ed., pp. 334-335.

10. 11.

Schumpeter, op. cit., pp. 302-303. E. Cannan, History of the Theories of Production And Distribution,

London,

1917.

12. H. Myint, Theories

Of Welfare Economics, London, 1948, p. 10.

13. M. Dobb, On Economic Theory And Socialism, London, 1955, p. 109. 14. Taylor, op. cit. pp., 251-252. 15. L. Robbins, An Essay On The Nature & Significance Of Economic Science, London, 1948 (2nd ed.), p. 76. 16. Joan Robinson, Economic Philosophy, London, 1962, p. 34. 17. Fraser, op. cit., p. 348. 18. A History of Economic Thought, New Ycrk, 1953, p. 424. 19. Production And Distribution Theories, op. cit., p. 3.

20. The Growth of Economic Thought, New Jersey, 1971, p. 505. 21. Op. cit., p. 266. 22. Risk, Uncertanity And Profit, New York, 1957, reprint, ch. IV.

23. Op, cit., pp. 543, 645-677. 24, Be Catherwood, Basic Theories of Distribution, London,

1939, pp. 237,

54.

25. J.A. Schumpeter,

Economic Doctrine And Method, London,

1954, p. 228.

26. Taylor, op. cit., p. 269. 27.

Myint, op. cit.

28. T.W. Hutchison, A Review Of Economic Doctrines, Oxford, 1953, p, 12. 29. Cf. Bye’s paper in R.G. Tugwell (ed.), The Trend of Economics, New York,

1930, p. 279. 30. Robbins’ 1936 paper reprinted in his book, The Evolution of Modern Economic Theory, Edinburgh, 1970, p. 175. 31. ibid., p. 174. 32. M. Blaug, Economic Theory in Retrospect, London, 1968 ed., p. 43. 33. Fraser, op. cit., p. 114. : 34. C. Gide & C. Rist, A History of Economic Doctrines, London, 1948 ed., pp 489-491. 35. Dobb. op. cit. 36. Blaug. op. cit. 37. Gide and Rist, op. cit.

38. All references are to the book edited by W.R. Scott, London,

1925.

39. 40. 41. 42. 43.

Op. cit., p. 301. The Founders of Political Economy, London, 1931, pp. 92-93. History of Economic Analysis p. 189. Op. cit., p. 61. The Evolution of Economic Thought, New York, 1970 ed., p. 74.

44.

Gide and Rist, op. cit., p. 97.

45. To quote, ‘‘It appears then that the wealth of a country depends partly upon the quantity of produce obtained by labour, and partly upon such adaptation of this quantity to the wants and powers of the existing

Value Approach in the Classical Theory of Distribution

15!

population as is calculated to give it value. Nothing can be more certain than that it is not determined by either of them alone.’ Principles, L.S.E.

46. 47. 48. 49. 50. ante 52; D3. 54. Sp) 56. Sif 58. 59: 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. le UP 73. 74. (be 76. Tile

78. IE). 80. 81. 82.

Reprints, p. 301.

Principles of Political Economy and Taxation, Everyman’s edition. Schumpeter, History of Economic Analysis, p. 553. Schumpeter however, we wish to take the phrase literally, we must take

adds, “‘If, the whole

se tence literally and this would make a physiocrat of Ricardo.” Haney, op. cit., p. 292. E. Roll, A History of Economic Thought, London, 1953, ed., p. 259.

Op. cit., p. 166. Op. cit., p. 341. Op. cit., pp. 109-110.

The Development of Economic Doctrine, London, 1931 ed., p. 173. Ops Cli» Das. ibid. Principles of Political Economy, ed. by Ashley, London, 1923, pp. 199-200. Blaug, op. cit., p. 181. Principles, op. cit. The Wealth of Nations, p. 60. Schumpeter, History of Economic Analysis, pp. 188-189. For details see Myint, op. cit., ch. 7.

G.F. Shove, ‘‘The Place of Marshall’s Principles in the Development of Economic theory”, Economic Journal, September 1942. D.H. Macgregor, Economic Thought and Policy, London, 1949, p. 16. O. St. Claire, A Key to Ricardo, London, 1957, pp. 265-267. The Evolution of Modern Economic Theory, p. 62. For details see G. Myrdal, The Political Element in the Development of Economic Theory, London, 1955 (2nd Impression), pp. 63-64. Myint, op. cit., ch. 7. Spiegel, op. cit., p. 336. An Outline of the Science of Political Economy, London, 1836. Myint, op. cit., p. 69. Blaug, op. cit., p. 197.

Gide and Rist, op. cit., pp. 364-365. Leading Principles of Political Economy, London, 1874. See Hutchison, op. cit., pp. 23-24. Schumpeter, History of Economic Analysis, p. 174. Myint, op. cit., p. 291. See his paper in American Economic Assocation, Readings in the Theory of Income Distribution, London, 1950. Types of Economic Theory (trans. by E. & C. Paul), Myint, op. cit., ch. 7.

London,

1930, p. 110.

ibid. Gide and Rist, op. cit., p. 129. Laces ge The Development pp.

of Economic

Thought, New York,

78-79.

83. See J.M. Clark’s essay in Spengler and Allen (eds.) op. cit., p. 432. 84. Essays on Value and Distribution, London, 1960, pp. 209-210. 85. Op cit., pp. 346-347.

1952,

CHAPTER

NINE

Theory of Rent as an Extension of Theory of Value: A Study in Historical Perspective The theory of value and the theory of rent are regarded by some historians of economic thought as ‘‘the most precious gems of political economy’’!. To quote C. Gide and C. Rist, ‘‘The theory of rent has always held a prominent place in economic science, especially during the earlier years of the nineteenth century, and the developments it has undergone since are significant equally from a theoretical as from a practical standpoint’. They go on, ‘*The theory of rent is an indispensable complement of the classical theory of distribution, giving the whole thing a much more realistic aspect. It is, as it were, the keystone of the whole structure’. But the theory of rent suffered an eclipse in its traditional importance with the ascendancy of the economics of imperfect competition. Thus B. F. Haley in his paper, published in 1949, pointed out that the theory of rent had received relatively little attention in contemporary theoretical discussions. The idea that rent constitutes a share in distribution functionally attributable to ‘a peculiar factor” was ‘‘probably no longer very generally held’’ so that ‘‘the old fires that burned hotly” had ‘‘about died out’. But lately, with the renewed interest in surplus analysis, has again become a fecund and prolific influence.

the

rent

idea

Meaning And Nature of Rent

The subject-matter of this chapter is the theory of rent

of land,

or the theory of ground rent, as it is alternatively called. In point of fact, ‘‘the conception of rent’, as Joan Robinson wrote over four decades ago, ‘‘has often been too closely interwoven with the conception of land’. Besides, rent has often been taken to signify

pure

rent

or economic

rent. For the sake of clarity it is essential

that the term ‘pure rent’ or ‘economic rent’ is defined first of all. In the total rent of land there will be included elements ofinterest and depreciation on the sums invested in the past. These elements must be subtracted from the total rent to arrive at pure or economic rent. It is pure rent, which is the price paid for the use of

‘the

original and

indestructible

powers

of the soil’. The rent of

Theory of Rent as an Extension of Theory of Value

153

land involves both the scarcity and the differential aspects: If land is taken to be a homogeneous factor, then its limited supply relatively to demand becomes a cause of its scarcity rent. But if land is taken to be a heterogeneous factor, then rent becomes the result of its differential fertility. For treating land as a homogeneous factor we have to assume that there are no differences of site or fertility among the individual pieces of land® or that these differences are of recs order so that the pieces are substitutable one for the other’.

Theory of Distribution As An Extension of Theory of Value The theory of distribution can be best regarded as a mere extension of the theory of value. An essential condition of a theory of value is that it should solve the problem of distribution as well. An analysis of value is the doorway to the theory of distribution. Distribution is a market process resulting from price formation. It can be seen as a process of valuation. In other words, the theory of value can be extended to the factors of production and includes a theory of distribution. Both theories form one organic whole. Demand and supply jointly determine not only product prices but

also factor prices. Through their interaction the will be fixed at the point where its demand supply®.

price of a factor is equated with its

Theory of Rent A complete and adequate theory of the rent of land would not only explain how the equilibrium level of rent is determined by the demand for and the supply of land but would also, at the same time, list and explain the factors

which

cause

fluctuations

in this

level since the levels determined at different times by the demand and supply forces would not be permanently or uniquely given and would be subject to rise and fall consequent upon changes in the demand and supply conditions, though they would show a tendency over a sufficiently long time-span to become equal to the equilibrium level.

For the most part, modern economics has abandoned the notion that there is any need for a special theory of ground rent. It considers the theory of differential rent interesting only because it marked the appearance of the marginal principle in economic theory®. Recent developments in the theory of rent have been integrated more closely with the theory of value than with the theory of distribution’®. In the writings of many economists rent has become one with profits. This reminds one of Marx, who made no analytical distinction between rent and profits’. What Marx had done actually was to merge rent with profits into the homogeneous

pool of surplus value and then let landlords and capitalists fight it out!*. This is why mention of rent in modern economic analysis suggests some reshuffling of income between profits and rent'*. Also,

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the elusive but important concept of economic rent has been generalised and relates not only to land but to all factors of production. It ensues to those specific inputs whose supply is perfectly inelastic’. Its explanation is based on the demand and supply approach adopted distinctly by Joan Robinson in her book on imperfect competition?®, ‘ Theory of Rent As An Extension of Theory of Pricing The theory of rent is a special case, with its own peculiar modification, of the general theory of value. Were we to assume land to be a homogeneous factor, then the hiring price of land per acre would be fixed by the demand for and the supply of land. The process of valuation of the services of land is subject to the same laws as the process of valuation of the services of any other factor. Land is an object of exchange, or at any rate of demand and supply. The level of rents is settled by supply and demand because landlords compete for tenants and tenants compete for land. The price paid for the use of land is the resultant of demand and

supply!”, The equilibrium’® level of rents will be governed by the demand for all the goods taken together which land produces and by the cost of using land at the margin'®. The margin of use of land will be determined at the point where the value of the marginal product of land equals its marginal cost. These two determinants can be expressed in annual terms and so can be rent, if we derive the demand for land from its annual product, and if we cansider the marginal cost of land as being the annual interest payments associated with the original cost of bringing it into use plus some maintenance charges’®. The equilibrium level of rents will be ‘‘that level at which the number of entrants to farming would equal the number of retiring farmers’’2!. Farming would mean any activity that uses land. This will assume that all farmers are tenants and that the average size of farms is not in the process of changing, that tenants and rentiers ('.e., owners or hirers of land) possess perfect knowledge, that labour and capital are perfectly mobile, and that the possibility of speculative changes in the value of land is ruled out.* “Just as the natural values of commodities may fluctuate above or below their normal values, so the actual rents paid for land may deviate from their normal amounts.’’?3 The equilibrium level of rents will vary when the equality between the number of entrants to farming and that of retiring farmers is upset. This equality may be upset when one or more of the following magnitudes vary: potential earnings

of tenants

outside

their

existing

occupations,

rent

of

dwellings other than tenants’ houses, non-pecuniary advantages of tenants’ present occupations, surplus producible on most lands, and supply of credit to tenants. Economic changes, such as a change in the level of national income at’ home but not abroad due toa change in domestic investment, a change in the supply curve of imported corn, or technical progress, affecting the equilibrium level

Theory of Rent as an Extension of Theory of Value

ey)

of rents, must work through one of these magnitudes, the fourth one being the most important in the short run. ‘‘It is probable that these factors exert their influence mainly by affecting the inflow of new farmers rather than those already working a farm, though a decline in farmers’ earnings might affect retirements’’4*. As the annual demand and supply prices for land shift up or down, rents, or more properly scarcity-values of land, will move up or down in sympathy.2°

But from the point of view of analysis it is the factors which lie behind the demand and supply side that are more important than the law of demand and supply itself?®. Therefore, let us now try to identify those factors. Factors on the Demand

Side

The demand for a factor of production depends on two principal influences: the technical conditions of production and the demand

for the product

that the factor produces. The technical conditions

include the marginal productivity of the factor, the ease with which one factor may be substituted for another and the importance of the factor in the total cost of production. The second influence implies simply this: the more elastic is the demand for a product, the more elastic will be the demand for the factors that make the product*’. The elasticity of demand for a factor will be greater, the better technical substitutes there are for it and it will be greater in

the long run than in the short run®®, On the demand side, even more fundamental than the quality of fertility of land are the attributes of ‘extension and support’?®. The demand for land is derived from the demand for its products. Land is demanded for purposes of production (e.g., extractive activities, water, business sites, etc.) as well as consumption (e.g., residence, recreation, health, etc.)*°. But instances are not lacking where the demand for land services is regarded as direct and land services are treated as a first order commodity®!. The demand for land tends to grow continuously as wealth increases. Land offers attractions as consumer’s capital®? It is regarded by its owner as a sort of savings bank in the sense that he feels that in the course of time the value of his property will be enhanced through the growth of population, higher standards of living, etc.*%.

Factors on the Supply Side The elasticity of supply of a factor of production depends on the factor concerned and on the time-horizon considered*4. Insofar as the owner of a factor of production normally obtains the bulk of his income from the sale of the use or services of his factor, the price which it can fetch in the market will exert a considerable influence on the amount he is willing to supply. Thus he may decide to withhold a part of his supply, not only when the price offered

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has fallen too low to be worthwhile, but also when the price offered has risen enough to give the same income as before by selling a smaller quantity*°. A certain fogginess prevails about the limitation of the supply

of

land. Two elements, which can rarely be separated in practice but are always separated in theory, may be said to constitute land. They are: (1) The variable element, which is the product of human effort and (2) The constant element, which comprises the anvantages of climate, aspect, situation, etc., which spring from the exclusive ownership and use of a site or of mineral deposits**. The effective supply of land, urges M. Abramovitz, is no mere matter of area but a value compounded of fertility, mineral content, climate, topography, and all the factors influencing accessibility. It is, therefore, highly sensitive to the technological progress which affects the

economic significance of all these qualities. But ‘‘it is a matter of choice whether the effects of technology on the supply of land are treated as an aspect of technological progress or of changing land supply’’8’, On the supply side, we have the feature not only of fixity of total supply of land but also of its immobility®*. The quality of land

in the sense of site and fertility varies from piece to piece with

a variation which is ‘‘immense in its range but fairly continuous in its gradation’’®. Much of modern land can be regarded as a produced good. The ‘‘original and indestructible powers of the soil” are somewhat of a myth*®. What is desired in land is not mere area but productive powers, the amount of which can be, and constantly is being, increased by man*!. The powers of the soil can be sapped by exhaustive cultivation and land can be reclaimed from the sea*®. The

difference between land and capital is more a difference of degree than of kind. ‘‘The difference between land and other pieces of capital equipment simply consists in the fact that land, as contrasted with capital, is not reproducible at will’. As J. R. Hicks puts it, land consists of all those durable-use goods which are given by nature and the supply of which cannot be readily increased, whereas fixed capital consists of those durable-use goods which are made by man and the supply of which can readily be increased‘*. But more subtle than this is the absence of a need to amortise an investment

in land which distinguishes capital invested in the extension of the margin of Jand use from capital invested elsewhere. The steadily rising maintenance costs plus obsolescence rule out all capital goods except land from perpetual use. ‘‘It is this ‘indestructible’ nature of the investment of the extension of the margin which we call land,

and it is this alone which

prevents

us from

treating land

as just

another form of capital as some writers have chosen to do’’45, Theoretically speaking, the stock of land at any time is the stock of it for all time. This idea finds its complement in the Edgeworthian concept that the supply curve of land can be represented by a vertical straight line*®. The total supply of land is perfectly inelastic*’. Land is a fixed factor even in the long run*’. It is ‘‘the concrete exhibit of a fixed resource’’4®. Every society has to take its

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land as a given factor and adapt the other factors to it®®. The supply of land suffers from ‘‘an inertia which the cajolery of price-changes is powerless to disturb’’®'. But this statement needs to be qualified. An increase in the price of its use tends to cause a more intensive exploitation of the poorer lands. So we have reactions completely analogous to those which in similar circumstances determine the prices and the available quantities of other productive services®?. The classical assumption of the perfectly inelastic supply curve of land is alleged to confuse ‘‘the problem of the potential supply of a factor with the realisation of the potentials’’.*? A rise or a fall in rent will have both income effect and substitution effect on the market supply of land. A rise in rent will induce land owners to supply more land as the cost of consuming its services directly in the

form

of a private

estate

increases,

that

is, the alternatives

foregone are greater. This is the substitution effect. With a rise in rent a smaller area of land will tend to be offered because the income per unit of land will be larger and the self-consumption of the services of land on the part of its owners will increase. Not until the substitution and the income effects of a change in rent have cancelled out fortuitously can it be assumed that the supply curve

of land is perfectly inelastic™. It is argued that there is no cost in the supply of land. is gained by the landlord by making no uss of his land. argument is not acceptable in practice. The supply invoives a certain cost. The annual supply cost®*

Nothing But this of land of land can be said to egual the annual interest payments on the original cost of clearing, levelling, draining, etc., which is associated with bringing it into use, plus some charge for yearly maintenance to keep it ‘‘clean and in good heart’°*®. There will be no need for an amortisation cost since properly kept land does not depreciate’.

Land is ordinarily owned in an enterprise system by individuals whose own psychologies in turn influence the relation of its supply to price. Two circumstances, one natural (i.e., land services have no cost) and the other, institutional (i.e., land is held by private persons who wish to sell or use these services for the maximum gross revenue) affect the supply conditions for land services in the modern enterprise economy*®. The owners of land will choose that use of it which yields the greatest net advantage to them. Net advantage will include both pecuniary and _ non-pecuniary elements®®. That land has a reserve price is evident from the fact that landowners keep land for their own enjoyment. They will have to choose between the income they can derive by letting it for rent and the loss of enjoyment of its amenities®’. As Stackelberg remarks, ‘‘The direct demand for land services, and thus also the supply of

direct services of Jand, is determined in such a way that the marginal rate of substitution of other commodities and direct services of land is at the same level for all households and equal to the real value of economic rent’’®!. We can conclude, therefore, that although the absolute scarcity of land is fixed by nature, its relative scarcity is

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the result of human activities and desires®. To put it differently, although the total supply of land is given and can be taken to be a stock for all practical purposes, yet because its suppliers have their own reserve price for the sale ofits services, there would be variations

in the

supply

of land forthcoming

at the market rent at any

given time such that the supply of land may not be exactly equal its stock, and the two would

to

differ, in consequence.

The probability of monopoly in the seiling of land services will turn largely on the degree of concentration of land ownership. In countries, where land ownership is concentrated, the phenomenon of land monopoly may become of considerable importance. Under

monopolistic selling the supply of land may be arbitrarily restricted so as toreap the maximum aggregate return from the supply as a whole and may presumably be set ata point where the marginal receipts from the sale of added land services equal zero.®

The Pre-Classical Thought From the latter half of the seventeenth century (when economists began to think of the nature of rent) to about the middle of the eighteenth century (that is, from Petty to Hume) it was generally

assumed that the rent of land was something like interest on money. The owner of Jand and the owner of money let or lent their respective instruments of production and commerce to farmers and merchants, who then surrendered a part of their profits or gain to the landlord and money-lender respectively, The payment to the former was called rent; that to the latter was called interest. the rate of each depended on supply and demand.

But

The Classical Approach The classical economists are accused of their failure to develop a general theory of pricing of productive — services.. David Ricardo had maintained that the theory of distribution could perhaps be separated from the theory of value. ‘‘After all, the great questions of rent, wages and profits must be explained by the proportions in which the whole produce is divided between landlords, capitalists and labourers, and which are not essentially connected with the doctrine of value.’’®* The classical economists derived the prices of products from the so-called natural rates of reward of the three factors of the production.® Their distribution

theory was ‘‘a compound of three separate theories.” The rent of land was determined asa differential surplus over the marginal cost of cultivation. Wages were governed by the long-run subsistence cost of labour. The rate of profit on capital was treated as a residual element. The classics were dominated by the class point of view and their distribution theory was expounded in terms of the aggregate social classes. Moreover, there was no unanimity of opinion among the classical economists either on the determination or on the method of realisation of the distribution of social income,

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which may justify the use of the expression ‘the classical theory of distribution.’ But ‘‘there is a plan of distribution composed of the the residue from their several theories which offers a picture of

some degree of unity.’ There is some truth in the indictment that the classical economists did not approach the problem of distribution as a problem of valuation at all.”° Scant attention was paid to the demand for the factors of production by them in their distribution theory.74_ Adam Smith and John Stuart Mill sponsored to some extent the view that the problems of income formation were to be conceived of as problems in the valuation or pricing of productive services but this view was not generally accepted and ‘‘even those French, German and Italian economsists who did more or less accept it—and even Say himself or Ferra—did not go through with the programme that this view implied.”’? So great was Ricardo’s success that even some writers, who

adopted

Say’s scheme

in other respects,

inserted into

it a Ricardian treatment of rent without betraying any symptom of logical discomfort. Malthus was among the builders of the supply and demand apnaratus.** As Schumpeter observes, the application of this apparatus, which was being slowly perfected during 17901870, should have been sufficient ‘‘to end all doubts as regards such points as whether improvements in agricultural methods of production benefit or injure the landowner’s interest.’’”4 The theory of rent is one of the main pillars on which the classical system rests.7? The classics regard land as ‘a passive and non-augmentable factor.’** During 1790-1870 explanations of the rent of land (generalised into the rent of natural agents) really were different theories based upon different principles. But this is not to deny the presence ofa unifying or cementing principle.” But weare theory of rent theory of price of the problem,

hard put to it to locate in the classical theory a determination or rent formation on the lines of the formation. The classicals examine diverse aspects such as, what rent is, why rent is paid to the land-

lord, how

originates,

rent

what

proportion

of the total

national

product goes to tbe landlords as rent and how this proportion is influenced by particular factors, how and why there is rise or fall in the natural or normal or equilibrium level of rent and what the extent of this rise or fall is, how rise or fallin rent affects the demand and supply of land, why different grades or pieces of land yield different rents, and

so on.

But

their discussion

of rent determination or rent formation well as lacks rigour and coherence.

of the process

is loose and

diffuse

as

It is contended by Buchanan that Adam Smith made his theory of prices into a theory of distribution.” But his theory of distribution is inserted in the middle of the chapter on prices as a mere appendage toor as a corollary of his doctrine of prices.7? In Wealth af Nations one comes across several explanations of the rent of land: Rent is the result of a monopoly price (‘‘The rent of land

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is naturally a monopoly price.” ‘‘As soon -as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even

for its natural produce’’).

In other words, it is determined by what

the farmer must pay rather than by what the landowner can afford to take. Itis the effect of price. (‘‘High or low wages and profit are the causes of high or low price; high or low rent is the effect of it.) Itis the surplus of price over wages and profits, and hence depends on demand. (‘‘Land produces a greater quantity of food than what is sufficient to maintain all the labour necessary for bringing it to the market ... The

surplus, too, is always more than

sufficient to replace the stock which employed that labour, together with its profits. Something, therefore, always remains for a rent to the landlord.’’) Smith was aware of the plurality of uses of land. He says that when the market price of a commodity sinks below its. natural price ‘“‘the interest of the landlords will immediately prompt them to withdraw a part of their Jand”’ into better rental uses than the low-price commodity affords.°° But he imperceptibly slips into considering rent for land as a whole. His followers emphasised this and ‘‘without further explanation deduced bold practical maxims from the assumption that the oppotrunity cost of land is zero.’’®* Smith was clear enough as to the causes which enable some lands to bear a heavier rent than others. He uses the term ‘‘real rent of land.’ According to him, every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land. Firstly, extension of improvement and cultivation tends to raise rent directly. Secondly, the rise of the price of the produce tends to raise rent in a still greater proportion. Thirdly, reductions in the price of manufactures tend to raise rent indirectly. Fourthly, every increase in the real wealth of the society via every increase in the quantity of useful labour employed within it tends indirectly to raise the rent of land. But this explanation of the causes of variations of rent is inadequate and erroneous.82 Moreover, Smith’s opinions as to the cause or origin of rent appear to have been somewhat confused.*3 Smith failed to distinguish clearly between pure rent and total income from the ownership of land.**

J.B. Say believed that production and distribution reduce to an exchange of services. He generalised land into natural agents.®* He seemed to regard rent simply as the normal outcome of the regular operation of the laws of demand and supply.8* In the course of a controversy with Ricardo he employed the argument that less fertile lands were brought under the plough when the price of corn had already risen consequent upon an increased demand for it, and an increased supply of corn arrested the rise in rent by bringing its price down. He demonstrated that the existence of rent was due to the needs of society and the prices which it could afford to pay ferits corn.8? This meant that ‘“‘the real cause of rent on all lands, whether good or bad, is really the same, namely, the insufficiency of supply to meet demand.’’8§ But despite this advance, Say

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himself spoiled his conception of incomes as prices of productive services by attributing the price of the services of land to the institution of private property in land.®® T.R. Malthus insisted that the interaction of supply and demand was paramount at every point in the pricing process.°° He considered the laws by which rent was governed and by which its increase or decrease was regulated. He viewed the rent of land as determined by the effects of human

industry and skill as well as by

the natural

qualities of the soil.2'

David

Malthusian

doctrine

Ricardo considered the

of rent to be the ‘“‘true doctrine of rent.’

Malthus was the author of the doctrine of diminishing returns as it related to the extension of cultivation to the poorer lands.* He considered the surplus from land, arising from its fertility, evidently ‘fas the foundation or main cause of all rent.’’*4 The existence of rent was, according to him, a clear indication of a most inestimable quality in the soil, which God had bestowed upon man—the quality of being able to maintain more persons than were necessary to work it. In other words, the surplus referred to above was the difference between the price of produce and the expenses of cultivation. Malthus denied the dominance of monopoly element. He gave the demand-creating power of the necessities of life as another cause of rent. He very frankly identified his principle of population with this second cause, which he thought necessary to give a value to the surplus produced by the first cause. There was a third cause of rent, viz., the scarcity of fertile land. This cause was the natural consequence of the second. Thus, Malthus definitely centred his entire explanation of rent on his principle of population. The last proposition of Smith on rent became the first cause of rent in

Malthus’ doctrine®. Malthus advanced four chief causes accumulation of capital increase of population

of changes in rent: (1) An which lowered the profits of stock, (2) An which lowered the wages of labour, (3)

Agricultural improvements or increases of exertions

which diminish-

ed the number of labourers necessary to produce a given effect, and (4) An increase in the price of agricultural produce from increased demand which enhanced the difference between the expense of production and the price of produce without nominally lowering the expense of production. Malthus held that it was not essential for a rise of rent that all four causes should operate at once. The “principal problem in political economy”, according to Ricardo, was the discovery of the laws which regulated the distributive shares. But Ricardo’s ‘‘concern in the problem of distribution was not due, or not only due, tothe interest in the question of distributive shares per se, but to the belief that the theory of distribution held the key to an understanding of the whole mechanism of the economic system...”%® It is true that Ricardo did not refer tothe law of demand and supply in his distribution theory. He assumed that labour and capital were combined in fixed:

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proportions. Shifts in demand from one to the other were ex hypothesi excluded. Even so, ‘‘his ingenious power of reasoning breaks through to an analysis of the causes of demand and supply of productive factors and hence of the forces which determine

distribution.”’®? ‘To Ricardo’’, says McConnell, ‘“‘the problem of distribution was inseparable from the problem of value, for, although in a letter to McCulloch in 1820 he denied that such dependence was necessary, his views constantly emphasised the close relationship of these two concepts.’’*8 Ricardo conceived of distribution ‘‘as a consequence of prices’’®? and in that way ‘‘brought the theory of distribution into relation with the theory of value.’’?® For the first time, Ricardo developed the theory of rent as a part of the theory of value. Rent is discussed as acorollary to the labour theory of value. It comes into operation only through the operation of the laws of prices. The entire teaching of Ricardo has his labour theory of value asits fulcrum.?°' Ricardo defined land as ‘‘the original and indestructible powers of the soil.’? On this definition, the landlord became at least economically ‘‘a parasite.””102 In Ricardo’s model land is taken up freely whenever it is needed and is taken, not away from some other rent-paying use, but from non-paying idleness. The only kind of rent emphasised is agricultural rent. Besides, it is rent for the raw produce of agriculture asa whole, not rent for land devoted to particular products. Land is treated as a specific, not asa specialised, factor, and its supply curve is nearly a vertical straight line: the quantity available

for use is almost independent of the price within limits. Both Malthus and Ricardo discuss why there should be any rents of land at all. But whereas Malthus had believed that the existence of rent was aclear indication of a most inestimable quality in the soil, which God had bestowed upon man—the quality of being able to maintain more persons than are necessary to work it, Ricardo believed that ‘‘the labour of nature is paid, not because she does much, but because she does little. In proportion as she becomes

niggardly in her gifts, she exacts a greater price for his work. Where she is munificently beneficient, she always works gratis.’’!®? Cannan regards this dispute as ‘‘perhaps one of sentiment rather than substance.’!° Although Ricardo raises some minor questions as to the first two causes of rent, as discussed by Malthus, yet he ostensi-

bly builds

his explanation

of rent on

Malthus, i.e., the comparative scarcity

the third cause indicated by of the most fertile land, and

‘fon this constructs his stairsteps of diminishing fertility and his embryonic idea of diminishing returns, and forms his differential surplus.’’!°> In the words of Ricardo, ‘‘It is only then because land is of different qualities with respect to its productive powers, and bacause in the progress of population land of an inferior quality or less advantageously situated is called into cultivation, that rent is ever paid for the use of it.”’ Ricardo emphatically denies mono‘poly as a causal force. Besides, monopoly rent is so small that no

objection could he raised to leaving it out of account.

In Ricardo’s

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163

Opinion, it is capital, and not food, which controls population. His rent theory conjures up the picture of a continuous process by which, as population increases, cultivation 1s extended to less and less fertile soils. Rent isthe direct product of the fact that equal values are sometimes produced at unequal costs. ‘‘Corn is regulated by the productiveness of the portion of capital last employed on the land, and paying no rent.’ Since homogeneous doses ofcapital and labour,

reduced

to one

variable input,

are

applied

in fixed

proportions to a fixed supply of land subject to diminishing returns, the variable input obtains its marginal product and the fixed input earns a surplus determined by the gap between the average product and the marginal product of the variable input for both extensive and intensive cultivation. There are thus two adjuncts of the Ricardian theory of rent: One, the marginal principle which explains the share of rent and two, the surplus principle which explains the division of the risidue between wages and profits.1°° On the basis of the Ricardian assumptions, the rise of rent reflects the fall of profits. Rising rents and falling profits are regarded as ‘‘co-effects of a single cause’—

diminishing returns in agriculture.1° ‘‘The degree of the fall of profits and the rise of rents depends wholly on the increased expense of production... If, therefore, in the progress of countries in wealth and population, new portions of fertile land could be added to such countries, profits would never fall, nor rents rise.’’}° The rise of rent is ascribed by Ricardo totally to the fall in the rate of profit consequent upon diminishing returns in agriculture. Ricardo has endeavoured to disprove the existence of any other cause of the rise of rent except the necessity of ‘‘employing less productive industry.”’ He admits that rent may recover its old

level in spite of an improvement which at first causes a diminution in rent.

In the later editions

of the Principles

he concedes that when

a certain length of time has elapsed after an improvement, rent may be again as high as before but also that it may be higher than before as a result of the improvement. But this is held as in consistent by Cannan, “To allow that this increase of rent could not have happened without the improvement, and yet to maintain that the improvement is a cause of diminution rather than increase of

rent is inconsistent . . .’7109 This practice of explaining each factorial

proposition

does not

seem

to have

ended

reward by a separate

with

Ricardo.

For

even in the works of the classical economists after Ricardo, for instance, in the Principles of J.S. Mill, we have three separate ex-

planations of the major components of national income, which are imperfectly co-ordinated, and which have only tangential relation to value.42° But the post-Ricardian classicals seemed generally ‘‘to have been too much concerned in investigating the causes which make rents higher at one time than at another to trouble themselves much about the question why there should be any rents at all.’’21! N.W. Senior, like Malthus, stresses ‘‘the power of the soil of

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producing the subsistence of more persons than are required for its cultivation” as ‘‘the real cause of rent.’’4!2 ‘‘If the whole land of a country were required for cultivation’’, says J.S. Mill, ‘‘all of it might yield arent.’ Mill’s theory points towards supply and demand, that is, the principle that assimilates rent with all other kinds of incomes generated bya stationary process. Apparently, all that is needed is an intense demand and a supply that is never equal to that demand, so that the price is permanently above the cost of production. In sucha case even the worst land, assuming that all land is not of equal fertility, would yield arent. Mill was of the view that this rarely happened in the case of land, but was by no means uncommon in the case of mines. ‘‘Obviously, then, rent is not merely the outcome of unequal fertility, and the cause must be sought elsewhere.’’!14 But the great majority of economists did not take this route so that it is historically more realistic to speak of three distinct theories after all.'® All the same, Mill, like Smith, regards rent as the effect of monopoly. He adheres to the Ricardian theory that an improvement in agriculture must diminish rent unless or until there is an increase of demand for the produce of land. Hehas ‘‘nothing to say about the causes which produce variations of rent.’’!/®

The Marginalists ‘The void left by the decline in prestige of the classical ‘natural’ laws of distribution was not filled until the eighteen nineties and then hardly with a doctrine of equal inexorability.”27 The three streams of economic theory, which had taken their rise in the

seventies, school, the

tended to flow in three separate Laussane school,

channels—the Austrian

and the English or Marshallian or re-

formed Ricardian school—instead of merging into a single flood, ‘though there were, of course, more or less important pre-colations from one to the other.”!’8 ‘*With the neo-classical or marginalist theories ... the problem of distribution is merely one aspect of the general pricing process; it has no particular theoretical significance

apart from

the importance

of the question per se.”1!®

Given the

supply of factors and their technical rates of transformation, the prices of productive services and the prices of consumer goods alike are determined by consumers’ wants. The marginalists made both demand and supply dependent on utility by treating all costs back to utilities foregone.1° The marginalists moved from the

subject of value to that of distribution and derived the demand prices for the productive services engaged inthe production of certain goods from the demand prices (for given supplies) of these goods. It achieved thereby ‘a better logical unification of value and distribution” than the classicals.’*!_ In their distribution theory the classicals had offered a different type of explanation of the value of each of the different factors of production. ‘This situation invited the use of the Razor, and it came, as it happened, in the form of an application of the marginal principle itself.’’}2* The marginalist

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165

distribution theory was derived from the Ricardian marginal principle but whereas Ricardo had employed the principle of limited substitutability only as regards the use of labour relative to land and had employed it for showing that a fixed factor would earn a surplus (determined by the gap between the average and marginal products of the variable factor), the marginalists formalised and generalised that principle and assumed that it held true of any factor in relation to any other and concentrated onthe reverse aspect (i.e., that any factor variable in supply would obtain a remuneration which, under competitive conditions, must correspond to its marginal product). “‘Thus, if the total supply of all factors (and not only land) is being taken as given, to be limited substitutes to one another, the shareout of the whole produce can be regarded as being determined by the marginal rates of substitution between them.’!*8 The classicals often thought as if distribution preceded valuation in a causative sense. On the other hand, the marginalists seemed to argue that ‘the rewards of the factors of production were the resultant of the prices of products.!24_

Besides, the classical distribution

theory was

a long-period theory, whereas the marginalist distribution theory was a short-period theory. In addition, the classical theory was, in the consequence, based on ‘‘a somewhat lifeless and mechanical view of a Stratified society in which particular social groups were made to correspond to functions in the economic process.’’ On the other hand, the marginalist theory developed a theory which was ‘‘in-

dependent of any specific social order.’’1*5 The marginalists seem to regard rent simply as the normal outcome of the operation of the law of demand and supply so much so that “‘the theory of rent so laboriously constructed by the classical school falls into the background as being comparatively useless.’’!?8 The marginalists were no longer under the necessity of explaining rent as a ‘left over’ sui generis but were able to explain it directly and on the same fundamental principle with other types of

income.!?’ WS. Jevons held the view that distribution was ‘entirely subject to the principles of value and the laws of supply and demand.’ ’”8 He agreed with Mill that since land had alternative uses, it had a supply price. While outlining the foundations of the modern theory of value, Carl Menger assimilated the theory of rent in the general theory of prices by categorically declaring that ‘‘the products of land, as far as the nature of their value is concerned, afford no exception to the general rule which applies to the value of the services of a machine or a tool, of a house or a factory, or any other econo-

mic good.’!2® Jn other words, the causes which regulate rent are to be sought among the causes which regulate the value ofinstruments of production in general.'8° von Wieser generalises the rent concept into ‘a universal law of differential imputation’ applicable to all factors of production including Jand.'** He examines the causes of fluctuations in natural rent. Contractual rent oscillates round the norm of natural rent. These fluctuations are dependent

166

Studies in Economic Analysis and Policy in Retrospect

on “‘the proportions existing between the supply and the demand for farm properties.” When the supply preponderates, the owners of estates will have to make concessions to the prospective tenants. The rents will not reach the full amount ascertained by adding natural rent and interest on the capital. Conversely, rents will rise when the demand exceeds the supply.}*?

The Neo-Marginalists During the last decade of the nineteenth century economists like Wicksteed, Wicksell and Clark were dominated by the idea that the old-fashioned Ricardian theory of rent was really a special case of a much more general theory. They realised that there was nothing unique about a no-rent margin. It is possible to picture a no-interest margin where the total product is exhausted by wages and rent, or, a no-wage margin where the entire price is resolvable into interest and rent. Hence the suggestion that the habit of defining land a la Ricardo as a free gift of nature be abandoned once-andfor-all.1°° According to Wicksteed, there is only one

law of distribu-

tion for determining the prices of the different factors of production, and not as many laws as there are factors. ‘‘The law of distribution, then, is one, and

is governed not

by the differences

of nature

in the factors, but by the identity of their differential effect.’’?%4 Wicksteed regards it as ‘‘impossible to draw the line either between land as a primitive gift of nature and land as embodying capital or the results of human effort’ and considers the attempt to distinguish accurately between them as ‘‘unnecessary”’ and ‘‘hopeless.’!%> Land and capital are virtually indistinguishable in J.B. Clark’s system. In his system ‘‘the Ricardian rent doctrine is correspondingly generalised, with doses and patient reversed.’’}*® The marginalist rent theory assumes that land has alternative uses. As soon as we relax this assumption and assume instead that the whole supply of Jand is meant for only one purpose, the marginal productivity analysis cannot be applied to determine the rent of land because its supply is fixed.187 Another objection to the marginal productivity theory of rent, as pointed out by Schumpeter, is this that many economists experience ‘‘an emotional resistance’’ to this theory which seems ‘‘to treat the landlord’s ‘unearned incomes’ on the same plane with the workman’s compensation for the sweat of his brow.”” But, as Schumpeter himself adds, these sentiments are completely irrational because ‘‘there is nothing in that theory to prevent an economist from differentiating as much as he pleases between the two on moral or political grounds.’’!*® The Equilibrium Theorists The equilibrium of the economy requires that demand and supply should balance each other and that this condition should be fulfilled at one and the same time for all goods and services.*? In the equilibrium theory prices of products as well as factors of

Theory of Rent as an Extension of Theory of Value

167

production are

The

mutually

and simultaneously

determined.44°

equilibrium theory enables us to give a still better demonstration of the general nature of the theory of rent.44! Leon Walras assumes that the supplies of factors of production and the technical input coefficients are given, with the result that the equilibrium in the factor market is simply a by-product of the equilibrium in the product market. But product prices are not determined until households have received income from the sales of factor services at certain prices. Obviously, product and factor prices are determined mutually and simultaneously. Rents in Vilfred Pareto, who built largely on foundations laid by Walras, signify the increased remunerations of some factors of production (inelastically supplied), when one position of equilibrium is, in a dynamic world, replaced by a new one.'42 It takes time to transform savings into capital. In the meantime, the older, pre-existing capital is able to enjoya temporary advantage, which gives rise to rent. While this is most evident in respect of Jand, the concept is applicable to all forms of capital.148 Gustav Cassel considers the problem of distribution not an independent problem of economic science but essentially a special aspect of the general problem of prices. According to him, in a state of equilibrium the prices of the means of production must

always

be such

that the demand

for these js adjusted

to

their

available supplies.144 Accordingly, he treats the problem of rent pre-eminently in accordance with the general formation of prices!*® and wants the separate treatment of the rent of land, inherited from the classical economics, to be abandoned. ‘‘The rent of land niust

be explained fundamentally by the scarcity of land, which makes it necessary to restrict the demand for the use of Jand by means of a particular price.’’!4 Alfred Marshall’s

The G.F.

analytical

Shove,/4”

Treatment

backbone

‘‘nothing

of Marshall’s

more or less

Principles is, contends

than a completion and gene-

ralisation, by means of a mathematical apparatus, of Ricardo’s theory of value and distribution as expounded by J.S. Mill’’—the search for ‘‘the one in the many, the many in the one.” ‘‘It is not, as many have supposed, a conflation of Ricardian notions with those of the ‘marginal utility’ school. Nor is it an attempt to substitute for Ricardian doctrine a new system of ideas arrived at by a different line of approach...the Principles is in the direct line of descent through Mill from Ricardo, and through Ricardo from Adam Smith. It is of the true Ricardian stock neither a cross-bred nora sport.’ Shove adds, ‘‘The mainline of development from Adam Smith to Marshall is a continuous growth from a single stem, with Jevons and (on one side of his work) Malthus standing apart | from it.”’!48 The ‘‘kerne!’’ of Marshall’s theory of distribution ‘“‘is based in the first instance on Adam Smith, Malthus and Ricardo, and in the second on von Thunen as regards substance, and Cournot as regards the form of the thought.’’4® Marshall was indebted

168

Studies in Economic Analysis and Policy in Retrospect

to von Thunen for the principle

of substitution

and to Cournot for

the principle of continuity. The determination of factorial rewards in the Principles is linked with the idea of the balance at the margin.

Marshall owed little or nothing to Jevons and nothing of importance ‘‘Though one cannot speak with confidence, one to the Austrians. may hazard the guess that Marshall began with the objective demand and supply schedules, the phenomena of the market-place, and worked back from them to their psychological basis, not (as was the case with Jevons) the other way about.’’!®° To quote Marshall: 1. “The general theory of the equilibrium of demand and supply is a Fundamental Idea running through the frames of all the various parts of the central problem of Distribution and Exchange.” (Alfred Marshall, Principles of Economics, Preface to the Ist ed.).

2. ‘*The normal value of everything whether it be a particuiar kind of labour or capital or anything else, rests, like the key-stone of an arch, balanced in equilibrium between the contending pressures of its two opposing sides, the forces of demand press on the one side, and those of supply on the other.” (Alfred Marshall, Principles of Economics, 9th C.W. Guillebaud, p. 526).

variorum ed. by

From these quotations it is evident that Marshall ‘‘consistently treats distribution as apart of the valuation process.’’!>! He sees ‘tthe problems of distribution as an integral part of the valuation process.’’*? For him the theories of distribution and value are “‘indissolubly interlocked.’’}’ His distribution theory is ‘‘simply an application of his value theory to special circumstances.” He examines ‘‘the long-run condition of supply and demand that determines the Jong-run price of each factor of production.’4 The Marshallian analysis of the equilibrium of value, according to Eric Roll, already includes a theory of distribution, since it establishes a series of relations between the earnings and the supplies of, and the demands for, factors as well as the prices of their products. Marshall’s use of the time-factor enabled him to distinguish between factor incomes that are price-determining and those that are pricedetermined,' ‘‘In other words, as inthe theory of exchange, so also in that of distribution, Marshall was anxious to preserve the dual character of his analogy of the ‘pair of scissors’.”’!°* Exchange, production and distribution have thus become closely inter-related. Whether the tracing of the path to equilibrium involves the factors appropriate to one or more of them depends on the period of time taken into account. The special place given to the distinction between adjustments over different periods of time (or the various orders of change)'*” in Marshall’s value theory also helps to join together the problems of supply, demand and price of goods with

Theory of Rent as an Extension of Theory of Value

169

those of the supply, demand and price of the factors of production.1°8 Marshall pursues a meticulous examination of the pricing process into every corner of the economic system. The principle of mutual determination everywhere in his Principles supersedes the idea of a single determinant or a one-way chain of causes. The conditions of demand are everywhere given equal status with ‘hose of supply.'*® In brief, the purpose of Marshall’s distribution theory was ‘‘to discover the forces that influenced the supply and demand for each factor.’® But, even so, there remains the fact that Marshall had ‘‘shied away from the task of putting forward a general theory of distribution altogether.’’!®' His distribution theory is a short-period theory but the short-period

distributive shares of the

factors are determined by long-period forces.'® Marshall holds that ‘‘the theory of the rent of land is no isolated doctrine, but merely one of the chief applications ofa particular corollary from the general theory of demand and supply.’!® The amount of produce raised, and hence the position of the margin of cultivation (i.e., the margin of profitable application of capital and labour to good and bad land alike) are both governed by the general conditions of demand and supply. They are governed, on the one hand, by demand, that is, the numbers of the population who consume the produce, the intensity of their need for it, and their means of paying for it; and, on the other hand, by supply, that is, by the extent and the numbers and resources of those ready to cultivate it.1°4 Marshall, like Ricardo, singles out land as a unique resource because it is virtually unresponsive to the higher rates of rent. Like Ricardo, again, he reserves the term ‘rent’ for the so-called ‘‘free gifts of nature.” He states emphatically that land shares the influences of the law of demand and of substitution because the existing stock ofit, like the existing stock of capital or labour of any kind, tends to be shifted from one use to another till nothing could be gained for production by any further shifting.’° But this is so from the individual, and not the social point of view.!® In Marshall’s opinion, land in an old country is approximately (and in some senses, absolutely) a permanent and fixed stock. Appliances made by men, whether improvements in land, or in buildings, or machinery, etc., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising.1®* The chemical or mechanical properties of the soil on which its fertility largely depends can be modified and in extreme cases entirely changed by man’s action.!® Marshall asserts that the rent of land has peculiarities of its own, which are of vital importance from the point of view of theory as well as of practice.'® These peculiarities are derived from fixed space relationships and annuities of nature. But these are alterable

by investment.1”°

He further asserts that pure rent is scarcely ever

170

Studies in Economic Analysis and Policy in Retrospect

met with. He regards rent as a composite entity, comprising also a reward for the improvements made in land.17} Rent, according to Marshall, depends on three things: richness of land (which varies with the nature of the crops raised and the methods and intensity of cultivation); relative values of those articles the cultivator has to sell and those articles which he needs to buy (these are dependent on the industrial environment); and his ability (which may be normal or more than normal or less than normal).1"2

According to him, the demand for each agent increases with the supply of the others and the demand for it is lessened when any of

those others can profitably be substituted for it.17* The stock of land at any time is, according to Marshall, the stock for all time.’ Therefore, from the social point of view land is not on exactly the same footing as those implements of production which man can increase without limit.17> ‘‘While the supplies of all other agents of production respond in various degrees and various ways to the demand for their services, land makes no such response.’’!”° In anew country, says Marshall, land does not differ significantly from other capital goods; it has a definite supply price (reflecting the costs of bringing it into use, i.e., construction costs, depreciation and maintenance costs). The expenses of production of land include the costs of improvements made in its fertility. On the other hand, in an old country land is all settled. It is fixed in quantity. It has no supply price at which it can be produced.!”" Professor Robertson, like Shove, brackets Marshall with Ricardo and says that in the Ricardo—Marshall method ‘‘the existence of rent can be portrayed as being due to the superiority of certain pieces of land over those which it is only just worthwhile to use, and the amount of the rent of any particular acre as depending on the degree of this superiority.” But he adds that both Ricardo and Marshall had believed the distinction between land and other

factors to be sharp

but

Marshall

had

believed

it to be much less

sharp than Ricardo had done.’ Like Ricardo, Marshall regards the rent of land as always price-determined.!® There is no question of a long-run adjustment in the aggregate supply of land as well as of its cost of production being counter-balanced by its long-run supply price, as is the case with other factors of production. To quote Schumpeter, Marshall’s great summary of his theory of distribution proves beyond reasonable doubt that he accepted the marginal productivity theory of rent but he refused to recognise the break with Ricardo’s rent theory which this involved.%® In consequence, in the words of Hutchison, ‘“‘the classical theory of rent survives especially in Marshall’s version in an outwardly only slightly altered form in the new edifice of production and distribution theory built up in the nineties like some Anglo-Saxon masonry

left in a Norman cathedral.’’}8!

Theary of Rent as an Extension of Theory of Value

171

References IL Be ee Lewinski, p. E

The

Founders

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4. In H.S. Ellis (ed.), A Survey 5: 6.

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Political

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Equilibrium, New York, 1957, pp. 123-124; D.C. Hague and A.W. Stonier, The Essentials of Economics, London, 1955. pp. 62, 64; L.H. Haney, Value and Distribution, New York, 1939, R.G. Lipsey, Positive Economics, London, 1966, 2nd ed., p. 411; H. Myint, Theories of Welfare Economics, London, 1948, pp. 108-109; E. Preiser, ‘‘Property and Power in the Theory of Distribution”’ in Iniernational Economic Papers No. 2; D.H. Robertson, Lectures on Economic Principles, Indian ed., Bombay, 1961, Vol. I, p. 63; P.A. Samuelson, Economics, New York, 5th ed., p. 602, G.L.S. Shackle (ed.), A New Prospect of Economics, Liverpool. 1959, p. 113; and A.E. Waugh, Principles of Economics, New York, 1947, p. 721. . M. Blaug, Economic Theory in Retrospect, London, 19€8 (2nd ed.), p. 80.

. American

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. . . .

Readings Survey

in

the

Theory

of Income

of Contemporary

Eccnomics,

Illinois, 1956 (Sth Printing). N. Kaldor, Essays on Value and Distribution, London, 1960, p. 215. J.A. Schumpeter, History of Economic Analysis, London, 1954, p. 673 n. S. Weintraub, An Approach to the Theory of Income Distribution, Philadelphia, Ist ed., 1958, p. 84n. K.E. Boulding, Economic Analysis, London. 1955 (3rd ed.), pp. 573-595. See MW. Reder’s paper in M. Abramovitz et al, The Allocation of Economic Resources, Stanford, 1959. p. 182n. Reder is sceptical ofthis approach: ‘‘... this analysis is of virtually no assistance in empirical work

because

of

the

fact

that

we

have no way of measuring, or even

indicating the direction of movement of the weighted average elasticities of the various product demand and factor supply curves in any given time period.”’ Wi, See A. Cairncross, Jntroduction To Economics, 1963 ed., p. 324; E. Cannan. A Review of Economic Theory, London, 1929, p. 249; T.J.B. Hoff, Economic Calculation in the Socialist Society, London, 1949, p. 122; D.H. Robertson, Lectures on Economic Principles,

Indian

ed..

Bombay,

1961,

Vol. I, pp. 38-39, 63; Joan Robinson, The Accumulation of Capital, London, 1956, p. 289; and H. von Stackelberg. The Theory of the Market Economy

(ed. by A.T. Peacock). Andover, 1952, p. 251.

172

Studies in Econamic Analysis and Policy in Retrospect

18. The equilibrium

level of rents may also be called the long-run or normal level. The rent of land is a long-run problem. See G.J. Stigler’s essay in

American Economic Association, Distribution, London, 1950.

Readings

in

the

Theory

of Income

A. Cairncross, Introduction to Economics, Butterworths, 1963, ed., p. 324, . B. Bottomley, Factor Pricing and Economic Growth in Underdeveloped Rural Areas, Indian ed.. Calcutta, 1971, p. 34.

. R. Turvey, The Economics of Real Property, London, 1957, pp. 62-63. . R. T. Bye, Principles of Economics, Indian ed., Bombay, 1964, p. 543. OP

mCi.

. R. Turvey, op. cit., pp. 62-66. . A. Bottomley, op. cit. . G.S.L. Tucker, Progress and Profits in British Economic Thought 1650-1850, Cambridge, 1960, p. 38. . R.G. Lipsey, Positive Economics, London, 1966 (2nd ed.), p. 421. . G.J. Stigler, The Theory of Price, New York, 1953 (2nd Printing), p. 189. . D.H. Robertson, op. cit., p. 103. . L.H. Haney, Value and Distribution, New York, 1939, pp. 687-700.

. H. von. Stackelberg, The Theory of the Market

Economy (ed. by A.T.

Peacock), Andover, 1952, pp. 246-248.

. Joan Robinson, The Accumulation of Capital, London, 1956, p. 328. . L.H. Haney, Value and Distribution, New York, 1939, pp. 687-700. . R.G. Lipsey, Positive Economics, London,

1966 (2nd ed.), p. 482.

. H. Myint, Theories of Welfare Economics, London, 1948, p. 108. . A Cairncross, op. cit., pp. 58-64. . In B.F. Haley (ed.), A Survey of Contemporary Economics, Vol. I, Illinois,

1952, pp. 136-137. . D.H. Robertson, op. cit., p. 103. . H.D. Henderson, Supply and Demand, London, 1951, en., pp. 84-88. . F, Benham, Economics, 7th ed. (by F.W. Paish), London, 1964, p. 102. . F. Cannan, A Review of Economic Theory, London, 1929, p. 249.

. M. Dobb, Political Economy and Capitalism, London, 1950 ed., p. 145. . E. Schneider, Pricing and Equilibrium (trans. by T.W. Hutchison), London, 1952, pp. 284-286. . The Social Framework, Oxford, 1952 ed., pp. 72-75. . A. Bottomley, op. cit., pp. 30-31. . E. Fossati, The Theory of General Static Equilibrium, New York, 1957, Demligos . Joan Robinson, The Economics of Imperfect Competition, London, 1954 ed., p. 104.

. A, Lerner, The Economics of Control, New York. 1962 Printing, p. 218.

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. G.L.S. Shackle (ed.), D2 137.

4 New

Prospect

. Op—cit.

. A Bottomely, op. cit., pp. 2, 30-31.

of Economics,

Liverpool,

1959,

Theory of Rent as an Extension of Theory of Value

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56. A Martin, Economics & Agriculture, London 1958, p. 66. Sule A Bottomley, op. cit. 58. J.S. Bain, Pricing, Distribution and Employment, Indian ed., Calcutta, 1953, pp. 469-470, 563. Sy). R.G. Lipsey, op. cit., p. 428. 60. J.K. Eastham, An Introduction to Economic Analysis, London, 1950, p. 174. See also M. Dobb, Politicul

P. 143n.

Economy

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ed:,

61. The Theory of the Market Economy (ed. by A.T. Peacock) Andover, 1952, pp. 248-248. 62. J.A. Ryan, Distributive Justice, New York, 1927, p. 10. 63. J.S. Bain, op, cit., pp. 564-565, 571-72. Also, A Bottomley, op. cit., p. 2. 64. M. Beer, An Enquiry into Physiocracy, London, 1939, pp. 173-174. See also A.E. Monroe, Early Economic Thought, London, 1924. 65. G.J. Stigler, Production and Distribution Theories, New York, 1941 (10th Printing, 1961), p. 3.

66. T.H_ Hollander

(ed.),

:

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Ricardo

London, 1895, p. 72. 67. M. Blaug, Economic

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to

J. R.

London,

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1968

and

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London, 1917.

69. B.F. Catherwood, Basic Theories of Distribution, London, 1939, pp. 237, 254. 70. J.A. Schumpeter, History of Economic Analysis, London, 1954, p. 543. hk R.T. Bye in R.G. Tugwell (ed.), The Trend of Economics, New York, 1930, p. 279.

aps J.A. Schumpeter, op. cit., p. 645. 73. See his Inguiry into the Nature and

Progress of Rent, London, 1815 and _ his Principles of Political Economy, London, 1820, Ch. 3.

TA. History of Economic Anslysis, London, 1954, p. 677. 1S T.W. Hutchison, A Review of Economic Doctrines 1870-1929, Oxford, 1953, Dads:

76. H. Myint, Theories of Welfare Economics, Londen, 1948, p. 5. Wik J.A. Schumpeter, op. cit , p. 671. 78. See his paper in American Economic Association, Readings in the Theory of Income Distribution, London, 1950.

79. E. Cannan, History of the Theories of Production and Distribution, London, 1917, p. 186. 80. A. Senith, An Enquiry into the Nature and Causes of the Wealth of Nations

81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

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J.A. Schumpeter, op. cit., p. 671. J.A. Schumpeter, op. cit., p. 560. C. Gide and C. Rist, A History of Economic Richards), London, 1964 ed., pp. 572-583.

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Principles of Political Economy and Taxation, 1817, p. 1. Ricardo, London, 1957, p. 68. 94. Principles of Political Economy, London, 1820. 95. B.F. Catherwood, op, cit.

96. N. Kaldor, Essays on Value and Distribution, London, 1960, pp, 209-210. 97. G. Myrdal, The Political Element in the Development of Economic Theory, London, 1955 (2nd Impression), pp. 63-64. 98. J.W. McConnell, The Basic Teachings of the Great Economists, Philadelphia, 1947 Reprint, p. 219.

99. O. Spann, Types of Economic Theory (trans. by E.

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108. J.R. McCulloch, The Works of David Ricardo, London, 1846, p. 375. 109. History of theories of the Production and Distribution, London, 1917, p. 332. 110. R. Lekachman, A History of Economic Ideas, Indian Reprint, Delhi, 1967, Op Leese 111. E. Cannan, History of the Theories of Production and Distribution, London,

1917, p. 228. 112.

N.W. Senior, London, 1836.

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119. N. Kaldor, Essays on Value and Distribution, London, 1960, p. 211. 120.

M. Blaug, Economic Theory in Retrospect, London, 1968 (2nd ed.) pp. 302, 492. Bohm-Bawerk is reported to have condemned the inadequacy ofa mere demand and supply explanation, He talked disdainfully of the dual theory in which supply prices call forth the services of factors of production by overcoming physical and subjective resistance as a cOncession to classical economics: ‘‘The man who, when asked what determenes a certain price answers ‘Demand and Supply’, offers a husk for a kernel.’ Quoted by M. Dobb in his Political Economy and Capitalism, London, 1950 ed., p. 154.

121. O.H. Taylor, pp: 334-335.

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75

R.H. Barback, The Pricing of Manufactures, London, 1964, p. 2. N. Kaldor, op. cit., p. 219. M. Blaug, op. cit., pp. 302-303. E. Roll, A History of Economic Thought, London, 1953, p. 372. C. Gide and C. Rist, A History of Economic Doctrines (trans. Richards), London, 1964 ed., pp. 572-583, J.A. Schumpeter, History of Economic Analysis, London,

by R. 1954,

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128. 129% 130. ils 132.

W.S. Jevons, The Theory of Political Economy, London. 1879, Second ed. Quoted in Gide and Rist, op. cit., p. 582. See N.G. Pierson, Principles of Economics, London, 1902, p. 92. T.W. Hutchison, op. cit., p. 157.

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Economy (ed. by L.

Robbins), Lor don, 1935, IInd Vol., p. 789. 135. OD Gil. Do Dl4:

136. T.W. Hutchison, op. cit., p. 258. 137. J.K. Eastham, An Introduction to Economic Analysis, London, 1950, p. 177 and S. Weintraub, An Approach to the Theory of Income Distribution, Philadelphia, 1958, p. 172n. [‘‘An ‘opportunity cost’ is like a ghost which vanishes on being boldly confronted. Destroy the opportunity, and the cost vanishes’’. R.L. Hale in R.G. Tugwell (ed.), The Trend of Economics, New York, 1930]. Weintraub remarks, ‘‘This contention, however, becomes

tangled

with

the

old

idea

that

the elucidation of the forces prevailing

on the demand side must await an analysis of supply phenomenon.’’ J A. Schumpeter, op. cit., p. 934. G. Cassel, On Quantitative Thinking in Economics, Oxford, 1935, p. 151.

138. 139 140. See Buchanan’s essays in American Economic Association, Readings in the Theory of Income Distribution, London, 1950, pp. 629-630. 141. Gide and Rist, op. cit., p. 581. 142. R. Triffin, Moaopolistic Competition and General Equilibrium Cambridge, Mass., 1949, p. 173. See also E.H. Chamberlin, The

143.

144, 145.

Theory,

Theory

of

Monopolistic Competition, Cambridge, Harvard, 1950 (2nd _ Printing), PPslos 22512: B. B. Seligman. Muin Currents in Modern Economics, Glencoe, 1963 (3rd Printing), p. 402. The Theory of Social Economy (trans. by J. McCabe), Vol. I, London, 1923, pp. 147, 155.

See H. von Stackelberg, Peacock), Andover,

1952,

The Theory of the Market Economy (ed. by A. T. p. 242 and Theo

Suryanyi-Unger, Economics In

The Twentieth Century (ed. by E. R. A. Seligman),

London, 1932, p. 114. 146. On Quantitative Thinking In Economics, Oxford, 1935, p. 159. 147. See his paper entitled ‘‘The Place of Marshall's Principles in the Development of Economic Theory

in Economic

Jonrnal, Vol,

LIf. December,

1942,

pp. 294-295. 148. op. cit., p. 296.

149, See Marshall’s undated note printed in the Memorials of Alfred Marshall, ed. by A.C. Pigou, p. 100. 150. G. F. Shove, op. cit., p. 307. 151. L. H. Haney, History of Economic Thought, New York, 1953 ed., p. 645. 152. F. A. Neff, Economic Doctrines, New York, 1950.

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Studies in Economic Analysis and Policy in Retrospect

153. G. F. Shove, op. cit., p. 300. 154. P. C. Newman, The Development

of Economic

Thought,

New York, 1952,

p. 291.

155, E. Roll, A History of Economic Thought, London, 1953 ed., pp. 400-401. 156. Op. cit. TST. See R. Frisch, ‘‘Alfred Marshall’s Theory of Value’ in Quarterly Journal of Economics, Vol. LXIV, No. 4, November,

1950.

158. E. Roll, op. cit. 159. G. F. Shove, op. cit., p. 303. 160. B. B. Seligman, Main Currents in Modern Economics, Glencoe, 1963 (3rd Printing), p. 472.

161. N. Kaldor, Essays on Value and Distribution, London, 1960, p. 221. 162. op, cit., pp. 221-222, 163. A. Marshall, Principles of Economics, 9th (Variorum), ed. by C. W. _Guillebaud, p. 629. 164. op. cit., p. 427. 165. op. Clit., p- 535. 166. op. cit., pp. 170, 430. 167. op. cit., pp. 431-432. 168. op. cit., p. 630. 169. op. cit., (Preface to the Ist ed.). 170. op. cit., pp. 147, 427. 171. op. cit., pp. 421, 453-454. 172. op. cit., p. 631. 173. op. cit., pp. 559-560. 174. op. cit., p. 536. IBS Op. Cit... ps 1-70, 176. Op. Cit.,; Ps 5346 WHI op. cit., pp. 145, 443-444, 629-630. “178. D. H. Robertson, Lectures on Economic Principles, Indian ed., Bo nbay, 1961, Vol. I], pp. 40-41.

179. E. Roll, op. cit., pp. 400-401. 180. op. cit., p. 934n. 181. A Review of Economic Doctrines 1870-1929, Oxford, 1953, p. 14.

CHAPTER

TEN

Some Aspects of the Modern Theory of Rent: An Assessment The theory of value and the theory of rent are regarded by some historians of economic thought as ‘‘the most precious gems of political economy.’! To quote C.Gide and C.Rist, ‘‘The theory of rent has always held a prominent place in economic science, especially during the earlier years of the nineteenth century, and the developments it has undergone since are significant equally from a

theoretical as from a practical standpoint.’ They go on, ‘‘The theory of rent is an indispensable complement of the classical theory of distribution, giving the whole thing a much more realistic aspect. It is, as it were, the keystone of the whole structure.’ But the theory of rent suffered a set-back in its traditional importance on the advent of the marginal theory of value and distribution. Thus B.F. Haley in his paper, published in 1949, pointed out that the theory of rent had received relatively little attention in contemporary theoretical discussions, The idea that rent constitutes a share in distribution functionally attributable to ‘‘a peculiar factor” was *‘probably no longer very generally held” so that ‘‘the old fires that burned hotly’? had ‘‘about died out.’’4

I.

The Concept of Rent The subject-matter of this chapter is the modern

theory of rent

of land, or ground rent, which is firmly based on the demand and supply approach. In point of fact, ‘‘the conception of rent”, as Joan Robinson

wrote a little over four decades ago,

‘‘has

closely interwoven with the conception of land,’’® often

been

taken

to signify

often

been too

Besides, rent

pure rent or economic

rent.

has

For the

sake of clarity it is necessary that we first define the term ‘pure rent’ or ‘economic rent’. In the total rent of land will be included elements of interest and depreciation on the sums invested in the past. These elements must be subtracted from the total rent in order to arrive at pure or economic rent. It is pure rent, which is the price paid for the use of ‘‘the original and indestructible powers of the soil.”’ The rentofland involves both the scarcity and the differential aspects: If land is taken to be a homogeneous factor,

then its limited supply relatively to demand becomes a cause

of its

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scarcity rent. But if land is taken to be a heterogeneous factor, then rent becomes the result of its differential fertility. For treating land as a homogeneous factor we have to assume that there are no differences of site or fertility among the individual pieces of land,® or that these differences are ofinfinitesimal order so that the pieces are substitutable one for the other.’ For the most part, modern economics has abandoned the notion that there is any need for a special theory of ground rent. It considers the theory of differential rent interesting only because it marked the appearance of the marginal principle in economic thceory.§ Recent development in the theory of rent have been integrated more closely with the theory of value than with the theory of distribution.® In the writings of many economists rent has become one with profits.1° The only distinction between (economic) rents and proats, ’ according to Stigler, is that when they accrue to the owners of factors of production hired or purchased by the firm, they are called rents, but when they accrue to the entrepreneur, they may be called profits.11

This reminds one of Marx, who made no analytical

distinction between rent and profits.* What Marx had actually done was to merge rent with profits into the homogeneous pool of surplus value and then let landlords and capitalists fight it out.1% This is why mention of rent in modern economic analysis suggests some reshuffling of income between profits and rent.!4 This viewpoint can be traced back to Pareto in whose work rents signify the increased remunerations of some factors of production (inelastically supplied), when one position of equilibrium is, in a dynamic world, replaced by a new one.!® It takes time to transform savings into capital. In the meantime, the older, pre-existing capitalis able to enjoy a temporary advantage, which gives rise to rent. While this is most evident in respect of land, the concept is applicable to all forms of capital.1® There is some disagreement over the appropriate definition and measurement of ‘‘economic rent.’’!” The term ‘‘economic rent’ is ‘fa most unfortunate one.’”? As an author puts it succinctly, ‘‘The adjective ecnomic is often dropped and the economist often speaks of rent when he means economic rent, thus causing a confusion between the concept ofa surplus over and above transfer earnings and the payment made to landlords for hiring of land and buildings.’’!8 The *‘elusive but important’? concept of economic rent has been generalised in modern economic analysis and relates not only to land but also to other factors of production. It ensues to those specific inputs whose supply is not perfectly elastic.!® It connotes part of their earnings. Its explanation is based on the demand and supply approach adopted distinctly by

Joan

Robinson

in

her

book

The

Economics

of

Imperfect

Competition.°°

II.

The Opportunity Cost Approach

Whether rent is or is not a price-determining cost depends in the modern rent theory on the particular viewpoint which an author

Some Aspects of the Modern Theory of. Rent

179

adopts.*4._ Which rent concept would be relevant would rest on the demarcated area of the economy he is considering. This, in turn, would turn on both the spatial and temporal aspects of that concept." There can be real differences between the opportunity cost of a factor of production to society, to an industry and toa firm, or to use Pigou’s terminology, between its marginal social (net) product and marginal private (net) product.2° Modern economists sometimes label such factors of production as can be used in only one occupation or industry (say, agriculture) ““specific’, and the returns to the owners of such factors are often

called ‘‘rents.”24

Pareto

defined

‘‘economic

rent”

as the

excess

payment to a factor over and above the minimum amount necessary to keep it in its present occupation.?*

In modern economics “‘particular units of factors of production which belong to the other three broad categories: labour, entrepreneurship and capital’? are also said to earn rent. Thus the conception has been generalised to include all factors. According to Mrs. Robinson, ‘‘The essence of the conception of rent is the conception of a surplus earned by a particular part of a factor of production over and above the minimum earning necessary to induce it to do its work.’ On this definition, no part of a factor will earn rent, if the factor in question is in perfectly elastic supply for all amounts*® In the modern concept of (economic) rent, whether Paretian or Robinsonian, the alternative to the present use of a factor

is its next or second best use, assuming away

all non-pecu-

niary gains accruing to it in its alternative uses.2” For instance, there is a real cost to the community, as Henderson puts it, when a given land is used for one particular purpose and is, therefore, not available for other purposes. Rent is the money measure, and “generally speaking an accurate measure at the margin of transference between one occupation and another.’’*® This shift of emphasis from defining rent as ‘‘a surplus over and above the income required to bring the factor unit into some use (no matter which)’ to defining it as ‘‘a surplus over and above the income required to

keep a factor unit in a specifically defined occuption”’ made its debut mainly in the neo-classical period and was associated with a shift away from interpreting ‘‘real costs” as pain costs.?® To earn ‘‘true rent’’ or “‘surplus’’ or ‘‘economic rent’? a factor of production must, according to the modern theory, be in ‘‘short

and pretty well fixed supply” relatively to the demand for it.°° That is, rent can arise only when the supply of any factor of production is less than perfectly elastic. Ifthe supply were perfectly elastic, then, by definition, the supply prices of all units of a factor would be the same. The market price of that factor would be exactly equal to the supply price. This amounts to saying that an increased demand would merely call forth more units at the same price. But when the supply of a factor is less than perfectly elastic, the units of that factor which have the lowest supply price will be used first. So

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long as only these units are used, there will be no rent. As soon as the demand increases to a point where it is necessary to employ high-priced units of that factor, rent will arise on those units of it the supply price of which is lower, since in a competitive market

they will be able to demand the same market price as is received those units which are just forthcoming at the market price.*1

by

This theory, which is also known as the transfer cost or displacement cost or opportunity cost theory of rent, regards the factors of production as ‘‘versatile’’, i.e., of multiple uses,®? or as ‘‘specialized’, i.e., very productive in one use as compared to all other uses. The excess of the return of a specialized factor in the best use over its possible return in other uses is the measure of its rent, according to Stigler.*3 Fellner designates transfer price or cost of a factor ‘transfer rent’. Transfer rent is price-determining. True rent or surplus or economi¢ rent is price-determined and is, of course, always ‘‘a consequence of supply limitations.’’** The actual earning of a factor in its present employment can be looked upon as a composite or compound of its transfer earning (that is, transfer price or cost, i.e., what it can earn elsewhere) and its economic rent. How much of a given payment to a factor (that is, its actual earning) is an economic rent and how much of itis a transfer earning depends on what sort of transfer we are considering. If we consider the transfer of a factor from one firm to another within a single industry for which the supply of the factor should be highly elastic, then pretty well all of its actual earning will be transfer earning. On the other hand, if we are considering the transfer of a factor from one industry to another, then part of the payment may be a transfer earning and part an economic rent, since its mobility as well as its supply curve will be less elastic.:® From this microeconomic viewpoint transfer rent like all prices is ‘‘a test, even though an imperfect one, of social need.’ Its payment ‘‘roughly ensures the most economical distribution of a given factor between different uses.’’*®

III.

The Three Points of View: Society, Industry And Firm

The classical (Ricardian, to be candid) theory of-rent was concerned not with the problem of ‘‘transfer rent’? but instead with that of rent formation in land-using activities (i.e., agriculture) viewed macro-economically (1.e,, jrom the point of view of society or economy asawhole) as one unit. It treated land as a specific ‘‘factor.’’%? The cost of a factor to society is also the value of its foregone

product.*®

In the classical theory since there is no

foregone

alter-

native of land, there is no cost, and the entire earning of land isa surplus or true rent or economic rent. To cite a remark, ‘‘An opportunity cost is like a ghost which vanishes on being boldly confronted. Destroy the opportunity, and the cost vanishes.’’°84 In the traditional theory the alternative to the present use of Jand is complete idleness. The transfer price of land, therefore, is zero. Land has but ‘‘scrap value’’, as Myint chooses to describe it.*®

Some Aspects of the Modern Theory of Rent

181

Since land is ‘a free gift of nature’ and hence, by definition, is not reproducible at any time and does not involve any cost of repiacement, Ricardo considers the earnings of land to bea surplus or unearned income or pure rent without time limit, thereby covering up the problem of the duration of rent flows, the size of the required income as well as alternative occupations.*? In other words, the total supply of land is taken to be perfectly inelastic. Froim the point of view of society or economy as a whole, land, conceptually speaking, is provided free, and the whole of its rent is a pure surplus, and none of it is a real cost. From this standpoint, any payment for the use of land is a surplus over supply price, and is not an element of cost of production.4! Insofar as the supply of land cannot be varied, it is impossible to talk about its marginal product. In mathematical language, it is not possible to differentiate with

respect to a constant.!2 Fellner lists three main pillars of the Ricardian theory of rent, viz., (1) there exist no alternative occupations so far asland is concerned, (2) the income required to keep land in its present occupation is zero, and (3) the duration of the rent flow is infinite. The first two of these pillars cease to be valid even for rent from the ‘free gift of nature’, if account is taken of alternative occupations within agriculture. All these three pillars lose their validity for rents from other types of assets to which Marshall gave the nomenclature of quasi-rents.*?

Thus far we have largely equated the classical theory of rent with the Ricardian theory of it. But this is wrong and misleading as we shall see in a moment. In treating of the value of particular commodities Smith supposed the fields to have competing uses, while in treating of distribution and the value of ‘raw produce’’ he thought of farm land as a whole, it having no competing uses. While West, Malthus and Ricardo treated rent and price in connection with a problem that involved aspects of both value and distribution, their treatment was dominated by the point of view of the latter. They regarded land as a factor having no competing uses and grouped all its produce under one commodity which they called differently: ‘raw produce’, ‘food’, ‘corn’ (which they used in the generic sense to represent all grains raised from land). Jevons took for granted that land had competing uses. He discussed the problem from the point of view of exchange. He centred his treatment on different kinds of the produce of land and on the amount which any one of them must pay in order to hold'a given patch of land from other uses. For land producing only ‘‘raw produce as a whole’, there are, according to Buchanan, only two margins, namely, extensive and intensive, and only non-land agents of production shift on them. But for land producing particular products, there is, according to him, a third margin, in addition, i.e., ‘‘the product-changing margin’’ marked by the shifting of non-land agents

and land.

Land shifts from use to use in s2arch of its best earnings

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Studies in Economic: Analysis and Policy in Retrospect

as other agents do. This margin is made up of all those pieces of land on the margin of doubt whether it is better to continue producing a given product or to change over to another product. Rent in the modern theory arises on all grades or qualities of land when the total land available is so scarce retatively to the demand for it that its products fetch a price above marginal cost of production even on land of the lowest grade or quality. But the mere fact that a factor (here, land) is scarce does not constitute a Sufficient condition for the existence of rent, though it certainly constitutes its necessary condition.*® To explain successfully the phenomenon of the rent of land we must be in a position to show that the services of land are sufficiently scarce in relation

for these

services

such

to the

demand

that a payment will be made for their use.

Until all land is in use, land is not a scarce factor, and is not entitled to rent.46 If the quantity of land available is greater than what Schneider terms ‘‘saturation” demand, then obviously the rent will be nil. There will be only a rent above nil, if the quantity of land available is smaller than the saturation demand, i.e., if land is scarce. To wit, it is the shortage of land which results in rent being

above nil.47 Scarcity rent assumes homogeneous differential rent assumes heterogeneous land. But

land, whereas each grade of land is more or less homogeneous and scarce in supply. Therefore, differential rents are also scarcity rents in that sense. Again, a homogeneous land, which is scarce in supply, yields different (nonproportional) returns to the successive ‘doses’ of labour and capital applied to it. Therefore, scarcity rents are also differential rents in this sense.48 To quote Marshall, ‘‘In a sense all rents are scarcity rents, and all rents are differential rents.’’* A theoretically conceivable. though practically unlikely, case, mentioned by Myint, may arise when we have ‘‘highly versatile factors which manage to retain constant differential advantages over the marginal factor in whatever industry they happen to be.” Their ‘excess earnings” are in the nature of ‘‘pure scarcity rent’? and are not reduced by their transfer from one industry to another so long as their total supply remains constant relatively to the supply of other ‘‘ordinary”’ factors.°®

From the point of view of an industry producing a particular commodity, the necessary minimum payment for a factor is not the payment which will cause that factor to exist, but the payment which will cause it to take service in that particular industry rather than in another. The price which is necessary to retain a given unit of a factur in a certain industry may be called its transfer earning Or transfer price, since a reduction of the payment could cause it to be transferred elsewhere. Rent (i.e., economic or true or pure rent) is the difference between the actual earning of the unit of a factor and its transfer earning from the point of view of an industry. This is the real surplus or residuary.

Some Aspects of the Modern Theory of Rent

183

The supply of land to any one industry is perfectly elastic. It earns no rent but only transfer price in any one industry (or use). Each piece of land has a hierarchy of possible uses and each would be, *‘in a frictionless world’, devoted to its most profitable use. As demand and methods of production change, the hierarchy alters and the use to which it is put also alters asa sequel. “‘It isa mistake to suppose that one use of a factor is more profitable than another per se’’. From the point of view

of a particular

industry

transfer payments are as much a part of supply price as any other element of cost.*! As Cairncross remarks, the supply price of land to _any one branch of agriculture is by no means zero.®? Considered from the point of view of a single industry, at least a part of the rent of a land that has more than one use enters into the cost of production of its product and helps to determine its output. In order to obtain that land for any

particular

use,

an

industry

will

have to pay a rent that is at least equal to that which it could earn in other uses. As this industry expands and more land is required by it, a higher rent will have to be paid. This rent may be called the opportunity cost or transfer price or transfer earning of that land, and it will enter

into cost of production and hence

determine

price. Although of historical interest, it would not be out of place to refer here, in passing, to the approach of Marshall to this particular issue. Marshall does consider the alternative uses of land when he says, ‘‘Each crop strives against others for the possession of the land; and if any one crop shows signs of being more remunerative than before relatively to others, the cultivators will devote more of their land and resources to it.””,

oats

and

hops

to that outlay just induced inexpedient to price.’’®? But

and

He adds

further,

“In

equilibrium,

every other crop will yield the same net return

of capital and labour, which the cultivator is only to apply.’? And he concludes: ‘‘It is, therefore, say that the rent of land does not enter into their Marshall is not content with this. He forthwith

asserts: ‘“‘It is worse than inexpedient to say that the rent of the land does enter into their price: that is false.” The reason that he assigns for his objection is ‘‘very peculiar’, to use Stigler’s words. The land in question, Marshall contends, may raise hops ‘‘of exceptionally high quality.”” He goes on: ‘“‘There would be no simple numerical relation between the surplus, or rent which the land would yield under oats, and the marginal costs, which the price of the hops must cover.” Thus is played down the modern theory. But we have it on the authority of Stigler that there does exist such a ‘“‘simple numerical relationship” in the case of unspecialized lands: the rent secured from any one use must equal that from any other possible use. Othewise, returns will not be maximized and disequilibrium not averted. Conversely, when any land is specialized, the return beyond the amount resources could produce elsewhere is, of course, a pure rent, a price-determined quantity, and not a part of the cost of production. Normally, these two rents are not

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directly related. They will be directly related, if the specialization of land is permanent, whilst that of other factor is only temporary.™4 Summing up, from the industry point of view there can be some difference between the actual earning and the transfer earning of land, depending upon the demand for its product in that industry and hence upon its price. The excess of the former over the latter will be the measure of true rent, i.e.,rent inthe sense of a surplus, and will not enter into cost and hence not determine price. This may alternatively be called inter-industrial rent.°° Mrs. Robinson in her book alludes to the Pigovian case*** where a factor is in demand by a small group of industries. If any one of these industries expands, that amount available for the others is reduced. If the expanding industry only employs a negligible proportion of the factor, the reduction in the amount available for the rest will not have an appreciable effect upon the price of the factor, and its supply to the expanding industry will be perfectly elastic. But if this industry absorbs a considerable proportion of the factor, then its value to the others is raised as the industry expands, and the transfer earnings of units of it are

increased.

Its

supply price to the industry is, therefore, rising as the industry expands but since all the productive units composing the factor are similar

from

the

point

of view

of

the

relevant

transfer earnings of all units wiJl be the same and their prices, and none of them will earn true rent.

industries,

will

be equal

the

to

The Shovian case®*’, referred to by Mrs. Robinson, elucidates that

there will again be true rent in that industry from the point of view of which the units of a factor are homogeneous but are hetrogeneous from the point of view of the other industries because the units which successively find themselves at the margin of transference will have successively greater transfer prices, for they can be put to successively more profitable uses. Another variant of the case delineated by her posits that a factor may be heterogeneous from the point of view of one particular industry. But all industries may be using the same technique of production. The supply of that factor to that industry may remain perfectly elastic even when it expands and there will ensue no rent. Rent will accrue to a factor. when it is homogeneous from the point of view of all other industries, except the one which expands, from the point of view of which it is heterogeneous. Rent will also arise when a factor is heterogeneous from the point of view ofall industries. When certain units of a factor are reluctant for some reason or cther to abandon their present occupation and to join some other occupation in which they may earn more, their transfer cost to their present occupation

will be lower that it would otherwise have been.*® Considered from the point of view of an individual firm (or farm), which is one among many firms composing an industry, the whole payment to a factor of production, for example, the rent paid by

Some Aspects of the Modern Theory of Rent

185

it to the land used by it will be exactly equal to its transfer price and will as such enter into the cost of production, and hence determine the price of its product. It may be phrased inter-industrial rent.

As

Chamberlin

writes,

‘‘Although

rents

may

be

surpluses

from certain points of view, or for certain

purposes,

or

certain

individual

producer

interpretations,

they

are

to

the

subject

to no

different from any other money expense. They do not arise as a surplus from his own operations; they area cost rigidly imposed upon him by the competition of his rivals for the use of the rentyielding property. They figure inthe same way as do the wages of labour and the interest of capital in his computations as to the most advantageous proportion between the factors and as to the most advantageous scale of operations.’’®” Despite its widely acknowledged improvement over the classical theory the modern theory of rent is not without its detractors, The transfer earning or opportunity cost explanation of rent, according to Weintraub, seems ‘‘particularly futile in a model in which the growth of aggregate demand affects income and begs a comparison of the new income imputation with the old, rather than with an alternate current earning.” ‘‘The opportunity cost doctrine thus seems inapplicable to macro-economic analysis, however perceptive it is in stable stationary circumstances.” It fails to explain the phenomenon where ‘‘the earnings of factors remain fixed in amount while proceeds vary.”” In such a phenomenon the price paid by a firm for one factor will not exceed the sum at which substitute

factors can be obtained.*® Weintraub prefers to regard the earnings of versatile fixed factors as price-determined rent incomes, and argues that to accept the opportunity cost theory is ‘‘not to admit that the costs of versatile fixed factors are price determining, for what is entailed is simply the theorem that, .after output is once

determined, then prices must be adequate to cover the displacement cost of the versatile fixed agents. Ordinarily, the fact of displacement costs merely limits the range of output over which the factor may be used, rather than determines a unique volume. Necessary payments to the versatile fixed agents may also limit the number of firms in the field and the volume of fixed factors that are utilized there, but it does not influence the precise output volume once the factors are brought into the fold. Otherwise, the argument would lead to the erroneous proposition that fixed costs are output, and thus price—determining. On this interpretation, variable costs remain the sole output determining costs and thereby constitute the price-determining outlays. Earnings of versatile fixed factors continue basically to be price-determined rent incomes.” Reder is another economist who is very

much

doubtful

of this .

demand and supply approach. He observes, ‘‘This analysis is of virtually no assistance in empirical work because ofthe fact that we have no way of measuring, or even indicating the direction of movement of the weighted average elasticities of the various

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Studies in Economic Analysis and Policy in Retrospect

product demand and factor supply curves in any given time period’® A third critic, Mishan, rejects all (Ricardian, Paretian and Robinsonian) definitions of economic rent on the ground that they treat rent as a surplus which may be appropriated without any effects on the supply of the factor. Besides, he considers the omission of non-pecuniary, non-supply or non-cost andvatages from the transfer earnings of a factor a serious lapse. Accordingly, he offers four measures of a change in economic rent resulting from an actual or proposed price change.* All the same, the concept of transfer earning is held to be useful by several economists, notably, Benham, ‘‘for the light that it throws on the extent to which the costs of an industry may vary with its output.’ Inthe short run, when an industry expands, it has to withdraw resources from other industries by paying them as well as those which are already engaged in it more than they are at present earning. This is an event the significance of which can scarcely be exaggerated or belittled.

IV. The Theory of Rent As An Extension of the Theory of Pricing It should be clear by now that the modern theory of rent is a special case, with its own theory of value. Were we

peculiar modification, of the general to assume land to be a homogeneous

factor, then the hiring price of land per acre would be fixed by the demand for and the supply of land. The process of valuation of the services of land is subject to the same laws as the process of valuation of the services of any other factor. Land is an object of exchange, or at any, of demand and supply. The average (or equilibrium or general) level of rents is settled by supply and demand because landlords compete for tenants and tenants compete for land. The price paid for the use of land is therefore the resultant of demand and supply®. But from the point of view of analysis it is the factors which lie behind the demand and supply side that are more important than the law of demand and supply itself**. In order for the demand and supply analysis to be useful it must, as Samuelson emphasizes, ‘provide information concerning the way in which the equilibrium quantities will change as a result of changes in the parameters taken as independent data’’® Therefore, let us now try to track down and identify those factors. The

demand

curves

for

lands

depend

on technology, state of

demand for their products, and location in space.

On

the

demand

side, even more fundamental than the quality of fertility of land are the attributes of ‘extension and support’®®. The demand for land is derived from the demand for its products. Land is demanded for purposes of production (e.g., extractive activities, water, business

Some Aspects of the Modern Theory of Rent

187

sites, etc.) as well as consumption (e.g., residence, recreation, health, etc.)®’. But instances are not Jacking where the demand for land services is regarded as direct and land services are treated as a first order commodity®. The demand for land tends to grow continuously as wealth increases. Land offers attractions as consumer’s capital®. It is regarded by its owner as a sort of savings bank in the sense that he feels that in the course of time the value of his property will be enhanced through the growth of population, higher standards of living, etc”. Cannan’s remark ‘“‘certain fogginess still prevails about the limitation of the supply of land” holds good even to-day.” Two elements, which can rarely be separated in practice but are always separated in theory, may be said to constitute land. They are: (1) The variable element, which is the product of human effort and (2) The constant element, which comprises the advantages of climate, aspect, situation, etc., which spring from the exclusive ownership and use of a site or of mineral deposits’. So very exasperating has been the task of defining land that a writer is obliged to conclude thus: ‘‘It might have saved much time and trouble if the word ‘land’ had never come to be used as the name of a factor of production in economic theory’’’*4. The effective supply of land, urges M. Abramovitz, is no mere matter of area but a value compounded of fertility, mineral content, climate, topography, and all the factors influencing accessibility. It is, therefore, highly sensitive to the technological progress which affects the economic significance of all these qualities. But ‘‘it is a matter of choice whether the effects of technology on the supply of land are treated as an aspect of technological progress or of changing land supply’’*. On the supply side, we have the feature not only of fixity of total supply of land but also of its immobility’. The quality of land in the sense of site and fertility varies from piece to plece—a variation which is “immense in its range but fairly continuous in its gradation’. Much of modern land can be regarded as a produced good. The ‘‘original and indestructible powers of the soil’’ are ‘“‘somewhat of a myth’’’*. What is desired in landis not mere area but productive powers, the amount of which can be and constantly is being increased by man.’ The powers of the soil can be sapped by exhaustive cultivation and land can be reclaimed from the sea.”8 The difference between land and capital is more a difference of degree than of kind. ‘‘The difference between land and other pieces of capital equipment simply consists in the fact that land, as

contrasted with capital, is not reproducible at will”. As J. R. Hicks puts it, land consists of all those durable—use goods which are given by nature and the supply of which cannot be readily increased, whereas fixed capital consists of those durable-use goods which are made by man and the supply of which can readily be increased®. But more subtle than this is the absence of a need to amortise an investment in land which distinguishes capital invested in the extension of the margin of land use from capital invested elsewhere. The steadily rising maintenance costs plus obsolescence rule out all

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Studies in Economic Analysis and Policy in Retrospect

capital goods except land from perpetual use. “It is this ‘indestructible’ nature of the investment of the extension of the margin which we call land, and it is this alone which prevents us from treating land as just another form of capital as some writers have chosen LOCO

Theoretically speaking, the stock of land at any time isthe stock of it for all time. This idea finds its echo in the Edgeworthian concept that the supply curve of land can be represented by a vertical straight line’?. The total supply of land is perfectly inelastic’. Land is a fixed factor even in the long run‘. It is ‘‘the concrete exhibit of a fixed resource’’®*, Every society has to take its land as a given factor and adapt the other factors to it8*. The supply of land suffers from ‘‘an inertia which the cajolery of price-changes is powerless to disturb’’®’. But this statement needs to be qualified. An increase in the price of its use tends to cause a more intensive exploitation of the poorer lands. So we have reactions completely analogous to those which in similar circumstances determine the prices and available quantities of other productive services’. The classical assumption of the perfectly inelastic supply curve of land is alleged to confuse ‘“‘the problem of the potential supply of a factor with the realisation of the potentials’’®*. A rise or a fall in rent will have both income effect and substitution effect on the market supply of land. A rise in rent will induce land owners to supply more land as the cost of consuming its services directly in the form of a private estate increases, that is, the alternatives foregone are greater. This is the substitution effect. With arise in renta smaller area of land will tend to be offered because the income per unit of land will be larger and the self-consumption of the services of land on the part of its owners will increase. This is the income effect. Not until the substitution and income effects of a change in rent have cancelled out accidentally can it be assumed that the supply curve of land is perfectly inelistic®.

It has been often argued that there is no cost in the supply of land, that nothing is gained by the landlord by making no use of his land. But this argument has to encounter the contention that the supply of land in practice involves a certain cost. The.annual supply cost®l of land can be said to equal the annual interest payments on the original cost of clearing, levelling, draining, etc., which is associated with bringing it into use, plus some charge for yearly maintenance to keep it ‘“‘clean and in good heart’. There will, however, be no need for an amortisation cost since properly kept land does not depreciate®®. The supply curves for lands depend on the preferences of landowners as between different uses for it, on the costs of transferring land from one use to another, and on the size and nature of the stock of Jand®. Land is usually owned in an enterprise system by individuals whose own psychologies in turn influence the relation of its supply to price. Two circumstances, one natural (i.e., land

Some Aspects of the Modern Theory of Rent

189

services have no cost) and the other, institutional (i.e., land is held by private persons who wish to sell or use these services for the maximum gross revenue) affect the supply conditions for land services in the modern enterprise economy.” The owners of Jand will select that use ofitwhich yields the greatest net advantage to them. Net advantage will include both pecuniary and non-pecuniary elements®®. That land has a reserve price is evident from the fact that landowners keep land for their own enjoyment. They will have to choose between the income they can derive by letting it for rent and the loss of enjoyment of its amenities®’. As Stackelberg remarks, “The direct demand for land services, and thus also the supply of direct services of land, is determined

in such a way that the marginal

rate of substitution of other commodities and direct services of land is at the same level for all households and equal tothe real value of economic

absolute

the result

rent.”**

scarcity

We

can

of land

of human

conclude,

therefore, that although the

is fixed by nature, its relative scarcity is

activities

and desires®*. To put it differently,

although the total supply of land is given and can be taken to be a stock for all practical purposes, yet because its suppliers have their own reserve price for the sale of its services, there would be variations in the supply of land forthcoming at the market rent at any given time such that the supply of land may not be exactly equal to its stock, and the two would, in consequence, differ.

V. The Equilibrium Level of Rent A complete and adequate theory of rent of explain how the equilibrium level of rent demand for and the supply of land, but would explain, at the same time, the factors which

land would not only is determined by the also enumerate and cause fluctuations in

this level since the levels determined at different times by the demand and supply forces would not be permanently or uniquely given and would be subject to rise and fall consequent upon changes in the demand and supply conditions, though they would show a tendency over a sufficiently long time-span to become equal to the equilibrium level.

The equilibrium level of rent} will be governed by the demand for all the goods taken together which land produces and by the cost of using land at the margin.1°! The margin of use of land will be determined at the point where the value of the marginal product of land equals its marginal cost. These two determinants can be expressed in annual terms and so can be rent, jf we derive the demand for land from its annual product, and if we consider the marginal cost of land as being the annual interest payments associated with the original cost of bringing it into use plus some maintenance charges.!°* The equilibrium level of rents will be ‘‘that level at which the number of entrants to farming would equal the number of retiring farmers’’*®, Farming would mean any activity that uses land. This would assume that all farmers are tenants and

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Studies in Economic Analysis and Policy in Retrospect

that the average size of farms is not in the process of changing, that tenants and rentiers (i.e., owners or hirers of land) possess perfect knowledge, that labour and capital are perfectly mobile, and that the possibility of speculative changes in the value of land is ruled out.

‘‘Just

as

the

natural

values

of commodities

may

fluctuate above or below their normal values, so the actual rents paid for land may deviate from their normal amounts.’ The equilibrium level of rents will vary when the equality between the number of entrants to farming and that of retiring farmers is upset. This equality may be upset when one or more of the following magnitudes vary: potential earnings of tenants outside their existing occupations, rent of dwellings other than tenants’ houses, nonpecuniary advantages of tenants’ present occupations, surplus producible on most lands, and supply of credit to tenants. Economic changes, such as a change in the level of national income at home but not abroad due to a change in domestic investment, a change in the supply curve of imported corn, or technical progress, affecting the equilibrium level of rents, must work through one of these magnitudes, the fourth one being the most important in the short run. “‘It is probable that these factors exert their influence mainly by affecting the inflow of new farmers rather than those already working a farm, though a decline in farmers’ earnings might affect retirement.’1°6 As the annual demand and supply prices for land shift up or down, rents, or more properly scarcity-values of land, will move up or down in sympathy.!° A word may be added about imperfect competition in the field of rent of land. Schneider expounds a bilateral monopoly theory of fixation of rent of land. We can assume every piece of land to be an individuality. Any one who wishes to have it for the purpose of production will calculate from his production plan the upper limit to which he is willing to pay for the use of the land. On the other hand, the seller will calculate the lower limit for his supply price, which will be equal to the most lucrative of the other possible uses for the land. Where the price will be fixed within these limits cannot be discoverd simply by theoretical analysis.1°°

The probability of monopoly in the selling of land services will turn largely on the degree of concentration of land ownership. In countries, where land ownership is concentrated, the phenomenon of land monopoly may become of considerable importance. Under monopolistic selling the supply of land may be arbitrarily restricted so as to reap the maximum aggregate return from the supply asa whole and may presumably be set at a point where the marginal

receipts from the sale of added land services equal zero. References 1. Jan st. Lewinski,

The Founders of Political Economy, London 1931, p. 160.

2. A History of Economic Doctrines (trans. by R. Richards), London, 1964 ed., p. 570. .

Some Aspects of the Modern Theory of Rent . Ibid, p. 578. . In HLS. Ellis (ed.), A Survey 1956 (Sth printing), p. 25.

2

uo

. The Economic A. Bottomley, Areas, Indian . E. Schneider,

of Contemporary

Economics, Vol I, Ulinois,

of Imperfect Competition, London, 1954 ed., ch. 8. Factor Pricing And Economic Growth In Underdeveloped Rural ed., Calcutta, 1971, p. 31. Pricing and Equilibrium (trans. by T.W. Hutchison), London,

1952, pp. 284-286.

. M. Blaug, Economic Theory In Retrospect, London, 1968 (2nd ed,), p. 80. . See the Editors’ Introduction to American Economic Association, Readings in the Theory of Income Distribution, London, 1950, p. x.

. . .

B. F. Haley in H.S. Ellis (ed.), op. cit. The Theory of Price, New York, 1953 (2nd Printing), p. 180. N. Kaldor, Essays On Value And Distribution, London, 1960, p. 215. J. A: Schumpeter, History Of Economic Analysis, London, 1954, p. 673 n.

. S. Weintraub, An Approach to the Theory of Income Distribution, Philadelphia, Ist ed., 1958, p. 84n. . R. Triffin, Monopolistic Competition And General Equilibrium Theory, Cambridge, Mass., 1949, p. 173. . B.B. Seligman, Main Currents in Modern Economics, Glencoe, 1963 (3rd

Printing), p. 402. . See J.M. Currie, J.A. Murphy and A. Schmitz, ‘‘The Concept of Fconomic Surplus And Its Use In Economic Analysis’’, Economic Journal, December 1971, p. 758. . R.G, Lipsey, An Introduction To Positive Economics, London, 1963, p, 439. . K.E. Boulding, Economic Analysis, London, 1955 (3rd ed.), pp. 573, 595. . See M. W. Reder’s paper in M. Abramovitz et al. The Allocation of Economic Resources, Stanford, 1959, p. 182n. . P. A. Samuelson, Economics: An Introductory Analysis, New York, 1961 ed.,

p. 597.

. A.P. Lerner, The Economics of Control, New York, 1944, Ch. 18, p. 219: (‘‘Tre wider the point of view; the greater is the part of the payment that appears as surplus’’).

a . . .

. . . . .

Gide Stigier Op. cit. Ds Los. G.J. Stigler, op. cit., p. 99. Cours d’ Economic Politique, Vol. 2, Laussane, 1896. J. Robinson, op. cit., p. 102. (This constitutes the ‘locus classicus’ of the modern theory). G.J. Stigler, op. cit., pp. 98-100. Supply And Demand, London, 195{ ed. pp. 101-102. W. Fellner, Modern Economic Analysis, Tokyo, 1960, p. 78. R.G. Lipsey, op. cit., p. 439. A.L. Mesers, Elements of Modern Economics, Calcutta, 1956 (4th ed.),

Ch. 15. . S. Weintraub, op. cit., p. 176. WODACID ADalD: OP aciteeDa ee . R.G. Lipsey, op. cit., p. 442.

_ D.H. Robertson, Lectures On Economic 1961, p, 48. 37. Fellner, op. cit., p. 72. 38. G. J. Stigler, op. cit., p. 104.

Principles (Vol. {II), Bombay,

192

Studies in Economic Analysis and Policy in Retrospect

38a.

See R. L. Hale’s papeec in R.G, Tugwell (ed.), The Trend of Economics, New York, 1930, p. 201. 39. Theories Of Welfare Economics, London, 1948, p. 163.

40. Fellner, op. cit., p. 77: 4!. J. Robinson, op. cit.,

42.

J. K. Eastham,

An Introduction

To Economic

Analysis,

London.

1950,

pel73:

43. Op. cit., p. 76. 44.

See D. H. Buchanan’s paper in American -Economic Association, Readings iu the Theory of Income Distribution, London, 1950, pp. 609, 615, 628-629,

633, 637. 45.

J. Robiuson, op. cit.,

46. 47.

See Meyers, op. cit. Op. cit., pp. 284-286.

48, See A.W.

Stonier

and

D.C.

Hague,

A Textbook

of Economic

London, 196! (12th impression), p. 288 for details. 49. Prisciples of Economics, Vol. [, 9th variorum edition,

Theory,

London,

pp. 422-423.

1961,

50, Op. cit... ps 163. 51. J. Robinson, op. cit.,

52. Introduction To Economics, London, 1953 ed. p, 324. 53. Op, cit., pp, 435, 437n. 54. Production And Distribution Theories, New York, 1948, p. 94. 55.

Meyers, op. cit.

55a. A.C. Pigou, Economics of Welfare, ondon, 1946, 4th ed., p. 805. 55b. G. F. Shove’s papers in the Economic journal, June 1928 and March

56. Op. cit., See also W.J.

Baum],

Welfare

Economics Ard

1930.

the Theory

of

the State, Cambridge, Mass. 1952, pp. 37-38. 57. The Theory of Monopolistic Competition. Cambridge, Mass., 1950. p. 22. 58. Weintraub, op. cit., p.171.

59. 60. 61. 62.

Op. cit., pp. 177-178. See his paper in M. Abramovitz, et. al., op. cit., p. 182n. For a neat summary see Currie, Murphy and Schnitz, op. cit., pp. 759-760. F. Benham, Economics, London, 1955 (Sth ed.), p. 410.

63. See A. Cairncross, op. cit., p. 324; E. Cannan, A Review of Economic Theory, London, 1929, p. 249; T. J.B. Holf, Economic Calculation In the Socialist Society, London, 1949, p. 122; D. H. Robertson, op, cit., Vol. I,

pp. 38-3), 63; Joan Robinson, Ta? Accumulation of Capital, London, 1956, p. 289; and H. von Stackelberg, The Theory of the Market Economy (ed. by A. T. Peacock), Andover, 1952, p. 251.

64. G.S.L.

Tucker,

1850, Cambridge,

Progress

And Profits In British Economic Thought 1650-

1960, p. 38.

65. Foundations of Economic Analysis, Cambridge, Harvard, 1947, p. 257. 66. D. H. Robertson, op. cit., p. 103.

67. L. H. Haney, Value and Distribution, New York, 1939, pp. 687-700. 68. H. von Stackelberg, op. ciJ., pp. 246, 248. 69. J. Robinson, The Accumulation of Capital, p. 328. 70. L. H. Haney, op. cit., pp. 687-700. 71. E. Cannan, wp. cit., p. 249. 72. A. Cairncross, op: cit., pp. 58-64. 72a. L. M. Fraser, Economic Thought And Language, London,

1937, p. 232.

Some Aspects of the Modern Theory of: Rent ex

In B.F. Haley (ed.), A Survey of Contemporary Economics,

193 Vol. II, Illinois,

1952, pp. 136-137. 74. D.H. Robertson, op. cit., p. 103. 75. H.D. Henderson, op. cit., pp. 84, 88. 76. F. Benham, op. cit., p. 102. Th E. Cannan, op. cit., p. 249. 78. M. Dobb, Political Economy And Capitalism, London, 1950 ed., p. 145. 79. E Schneider, op. cit., pp. 284-286. 80. The Social Framework, Oxford, 1952 ed., pp. 72-75. 81. A. Bottomley, op. cit., pp. 30-31. 82. E. Se The Theory of General Static Equilibrium, New York, 1957, p.

83. 84. 85. 86. 87. 88. 89.

°

J. Robinson, The Economics of Imperfect Competition, p. 104. AS Pomeemeryopurcit..pe2is. S.Weintraub, op. cit., pp. 169-170. A.E.

Waugh. Principles of Economics, New York, 1947, p. 739.

H.D. Henderson, op. cit., pp. 30-31. E. Fossati, op. cit., p. 136.

aie

Shackle

p.

90. Ot: 92. 93. 94. 95.

(ed.),

A New

Prospect

of Economics,

Liverpool,

1959,

‘

op. cit.

A Bottomley, op. cit., pp. 2, 30-31. A. Martin, Economics & Agriculture, London, 1958, p. G6. A. Bottomley, op. cit.

M. Fleming, Introduction to Economic Analysis, London, 1969, pp. 226-227. J.S. Bain, Pricing, Distribution and Employment, Indian ed., Calcutta,

1+53, pp. 469-470, 563.

96. oF: 98, Og. 100.

R.G.

Lipsey, op. cit., p. 428.

J.K. Eastham, op. cit. See also M. Dobb. op. cit., p. 143n. op. cit., pp. 248-249, J.A. Ryan, Distributive Justice, New York, 1927, p. 10. The equilibrium level of rents may also be called the long-run or normal

level. The rent of land is a long-run problem. See G.J. Stigler’s essay in American Economic Association, Readings in the Theory of Income Distribution, London,

101. 102. 103. 104. 195. 106. 107. 108.

109.

1950.

A. Cairncross, op. cit., p. 324. A. Bottomley, op. cit., p. 34.

R. Turvey, The Economics of Real Property, London, 1957, pp. 62-63. R.T. Bye, Principles of Economics, Indian ed., Bombay, 1964, p. 543. op. cit.

R. Turvey, op. cit., pp. 62-66. A Bottomley, op. cit. op. cit., pp. 284-286. Alternatively, one form of market may well be that where the sellers face a small number of buyers. Different modes of behaviour will be appl’cable in sucha market. Some form of negotiating strategy will usually be adopted. J.S. Bain, op. cit., pp. 564-565, 571-572, Also, A Bottomley, op. cit., p. 2,

CHAPTER

Demand

ELEVEN

and Supply Approach in the

Classical Theory of Wages The classical theory of the determination of wages ina free market is ‘‘simply a special case of the general theory of value.’’ ‘“‘Wages are the price of labour; and thus, in the absence of control, they are determined, like all prices, by supply and demand.’! Smith’s theory, in general, is that ‘“‘wages depend on labour supply and demand.’’ He applies the law of demand and supply to the determination of wages.* His demand and supply theory of wages, though

in form

meant

to supplement

his

subsistence

theory, in

reality supersedes it.* According to Say, it is the relation of demand and supply which regulates the price of ‘‘that merchandise we call the labour of aworkman.” Ricardo regards labour as a commodity whose value must be determined in the same way as that of any

other commodity. He

considers

livelihood are an outcome of the

prices.”"4 The mechanism

constant

structure

of his

and

that

the wage-earner’s

working

of the

means

‘‘natural

law

of of

of his wage theory is very similar to “‘the

theory

predominant

of value.’”’®

Malthu:

emphasises

the

action of the principles of demand and

supply on the price of labour.® J.S. Mill went so far as to include labour among the commodities whose value is always determined by

demand and supply (Principles, London, 1888, People’s ed., pp. 343-344). In the classical theory labour is treated as a homogeneous factor. All types and grades of labour are reduced to multiples of normal labour, with the result that the theory dispenses with the question of relative wages and concerns itself with a single wage rate.

As a rule, under

free competition wages tend to be the same in all

occupations.’ The physical movement of workers and the wagesetting process are inextricably inter-woven. The market is cleared

at one single price of labour.®

I.

Forms of the Demand And Supply Approach

.

Historians of economic thought, such as J.A. Schumpeter, take the view that during 1790-1870 practically all economists attacked the wage problem by means of ‘fa more or less well-understood

supply and demand analysis.” Marx is included among them on

the

Demand and Supply Approach in the Classical Theory of Wages

ground that his proposition that wages tend to equal

the value

195

of

labour power, which in turn is identical with the labour embodied in it, connotes the interplay of demand and supply. The two classical explanations of wages, namely, the wages fund theory and the minimum-of-existence or subsistence theory, the one which is stated to explain the market wages and the other which is stated to explain the natural or normal wages, may, on this assertion, be “derived from a supply and demand analysis on the insertion of certain additional factual hypotheses (or restriction).’’®

Some economists do not think that the wages fund theory is incompatible with the subsistence theory of wages.!° Other economists investigate the possibility of reconstructing the classical demand and supply theory by combining the wages fund theory and the subsistence theory, and thereby arguing that the former accounts for the demand side and is relevant during the short run, whilst the latter is concerned with the supply side and pertains to the long run. But they themselves are critical of this innovation for ‘‘this raises aS many questions as it settles.”’!!

Through the first half of the nineteenth century alongwith the subsistence theory went the wages fund theory. According to Whittaker, these two theories were complementary, and not competitive. The subsistence theory explained the operation of the wages fund in terms of human beings. When the fund was large, wages exceeded the subsistence level; for the period population rose and forced down wages. When it was small, wages fell short of that level; for the period population fell and pushed up wages.!” This application of the demand and supply approach to the labour market by the classicists has taken two different forms: One form is noticeable in the writings of Longe and Thornton, where the general wage rate is uniquely determined, that is, only one equilibrium rate is possible. The other form is noticeable in the writings of J. S. Mill, where the general wage rate is compatible with various equilibria. Longe and Thornton regarded the demand for labour as a specific magnitude representing the quantity of circulating capital offered in relation to a given supply of labour. Mill considered the quantity of labour demanded and supplied in a schedule sense so that the equilibrium wage is a wage at which the quantity demanded equals the quantity supplied.'* As stated above, the classical theory of wages has two facets: a long-term equilibrium wage rate (i.e., the natural price of labour) and

a

series

of short-term

oscillations

round

it (i.e., the market

prices of labour). The market wage incessantly oscillates round the natural wage according to the exigencies of demand and supply. At any time there is demand for a certain number of individuals in order to meet the needs of industry. This is the indispensable minimum. The working population must be equal to this if the equilibrium wage has to remain. constant. The equilibrium wage is measured in terms of*‘corn’’, The workers as a class cannot directly

196

Studies in Economic Analysis and Policy in Retrospect

influence the demand for their services. This demand is governed pre-eminently by the stock of capital and the rate of profit. The short run in the case of wages is, admittedly, different from the short run in the case of prices of goods. In the case of wages it extends over sixteen or eighteen years. For short-runs of this and even greater Jengths the Ricardians rely on the particular form that the supply and demand apparatus takes in the wages fund doctrine.!4 During the long run the rate of growth of population and the supply of labour, as affected by the current levels of real wage in successive short runs, would be self-regulating such that its persistent tendency would be to make the réal wage of labour generally just equal to subsistence.!? Market wages turn on the rent at which capital accumulation froceeds, which in turn hinges on the state of demand. But the state of demand is never accorded a position co-ordinate with the state of supply in the classical theory.@ Population varies according as market wages are above or below the subsistence wage, which is the natural price

of labour,

and

which

is taken as a datum by the proponents of this theory. and

The wages fund theory uses ‘‘a peculiar kind’ of the demand supply apparatus. But the adjustment mechanism conceived of

by its exponents resembles that conceived of by them

as adjusting

the supply of any produced commodity to the demand for it and rrice to its cost of production,”

its

II. The Wages Fund Theory The wages fund theory is one of the ‘‘most fundamental tenets” and one of the ‘‘main pillars” of the classical economics.!8 A faint trace of this theory is found in Turgot’s writing. It is suggested in the writings of Smith, Malthus, Ricardo, McCulloch and J.S. Mill in some form or other. It serves both as a theory of wages anda theory of capital. It is an attempt to find an answer to the problem of wage determination in a free enterprise economy in macro-economic terms. It is one of ‘‘those aggregative macro-economic

generali-

sations, or definitional equations, first propounded as explaining how a key element in the economic system is ‘determined’...° Itisa macro-economic analysis of ‘“‘the limits of average aggregate wages,’”2°

The chief source of controversy and confusion about fund

theory

concerned

the wages

the relationship between it and the general

Jaw of demand and supply.

It is complained

that

‘‘the

forces

of

demand and supply, as they operate in the evaluation of labour, were not carefully and fairly analysed” in the wages fund theory.?! It is often presented as an ordinary case of the working of the law of demand and supply. But it lacks the notion of a schedule of demand and supply prices of labour.2? Some economists consider this theory to be a rigid demand and supply explanation of wages.23 Breit endeavours to show that this theory is perfectly reconcilable with the demand and supply analysis ‘‘in the Millian sense.”24 Scott

Demand and Supply Approach in the Classical Theory of Wages

197

regards the wages fund theory as the demand and supply theory.?® St. Lewinski is of the opinion that the wages fund theory is “‘only a special type of the theory of supply and demand.’’?é The wages fund is composed of both stock and revenue in Smith but only of the means of subsistence in Malthus and of circulating capital in Ricardo. In J.S. Mill it is advanced to both types of labour, productive and unproductive. The circulating capital is earmarked for the payment of wages to the labourers for their maintenance and the supply of labour as equal to the size of population.2” Inthe wages fund theory the amount of circulating capital (which Taussig terms ‘‘inchoate wealth’) is regarded asthe proper wages fund. It is employed chiefly for advancing wages to the labourers and is used up ina short time.28 Wages are ‘“‘paid out of’ capital only because production takes time, and the labourers (unlike the landlords) have their wages ‘‘advanced” to them by the capitalists since they cannot afford to wait. Although this is true of both fixed and circulating capital, yet only a small portion of total wages is paid in the classical theory out of fixed capital since the turn-over period is relatively long in its case. This is the reason why circulating capital is equated with the proper wages fund in this theory.*’ In short, the wages fund consists only of the inventory of wage goods, principally food products. This fund becomes available at successive harvests and is advanced tothe workers during the current period of production. This conception fitted the facts of the days of the early classicals when fixed or durable capital played but avery small part in economic life and the bulk of investment was in the form of circulating capital.2° The classicals do not always assume the proportion between the wages fund and the capital stock to be constant.*! But often they do. Where they do not, their theory gives them ‘“‘little guidance as to what proportion the wages fund would bear to the total capital stock.’*? The wages fund theory enunciates that higher profits stimulate capital accumulation and higher wages can only be a short-run phenomenon. It thus stresses the complementarity of capital and labour. In other words, it postulates that in the absence of a step-up in the pace of capital accumulation, the average wage rate cannot be raised permanently. The moral drawn from this theory is: ‘‘Produce more or procreate less.”

The wages fund theory is concerned primarily with the task of explaining the market price of labour, which rises or falls because the ratio between the wages fund and the supply of labour cannot be a fixed ratio when both or either can change. That is, the wage rate given by this theory cannot be unique. It will be a changing

rate.** far

All classicals believed

above the

subsistence

that ‘‘wages

level

by the

can only be sustained

continued

increase of the

funds out of which they are paid.’’*4 In the wages fund theory the demand for labour is derived from

the pre-determined

decisions

made

by the capitalists

as to the

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amount they would like to invest.2° The demand for Jabour is the offer made by the capitalists to pay wages in exchange for the production of other goods for consumption hereafter. It is represented in the theory in ‘‘a somewhat unusual manner’ by indicating a ‘‘su nn in real terms’’—wage goods, means of subsistence, variable or circulating capital, which capitalists have decided to spend on

labour. This demand too is no schedule, at any given moment, but rather a given quantity. There is no price of labour beyond which capitalists would refuse to go. ‘‘Having decided what to reserve for their own consumption, they cannot spend more or less than the wages fund.’’%® So far asthe supply of labour is concerned, the wages fund theory does not give us a schedule but gives us only a quantity of labour supplied by the workers ‘‘unconditionally for a short run of at least 15 years.’’°” Schumpeter

mentions

two

versions

of the

wages

fund theory,

viz, its short-run version and its long-run version. Since the quantity of labour supplied is given at each moment, since the wages fund to be spent on labour is given at each moment, and since, in equilibrium, the quantity of labour demanded must be equal to the quantity of labour supplied, we obtain an equation that will uniquely determine a magnitude called the average wage rate. If, during the short run, the demand for labour exceeds its supply, actual wages will be above this rate.

If, on

the other hand. during

the short run, the demand for labour falls short of its supply, actual wages will be below this rate.°* This is the short-run wages fund theory. But Schumpeter takes pains to show that no adherent of the classical theory really believed that the supply of labour and the wages fund were actually given constants. ‘‘On the contrary, propositions about their variation over time were not only a part, but the mest important part, of the doctrine.” The factor that governed labour supply was either the Malthusian law or else simply the ‘habits’ of the working class. The factor that governed the variation of the wages fund and, hence of the demand for labour, was saving. Therefore, given the productive efficiency of the economic system, the course, over time, of the real wage rate and.of the per capita real income of the working class depends upon the rate of propagation of the working class and the community’s rate of saving. All classical economists almost invariably admitted that the wages fund had to be accumulated and could not be increased without accumulation or saving.*® This is the long-run wages fund theory. Schumpeter, however, refuses to accept the short-run version as a real demand and supply theory ‘‘in the usual sense in which this means operating with demand and supply schedules.” But the long-run version can be presented in terms of such schedules. Labour supply can be represented asa function of real wage rates, as averred by the Malthusian law. Similarly, the quantities of labour demanded by the capitalists are a function of real wage rates since, at any moment, these wage rates turn on the size of the

wages fund; since the variations of the wages fund are governed by

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199

the rate of saving; since (given everybody’s propensity to save or ‘*effectual desire of accumulation”) savings rest chiefly on the capitalists’ income, and hence on their profits, and since profits depend on wages; and so on. But Schumpeter himself does not think much of this version either.*°

Ill.

Appraisal of the Wages Fund Theory The wages fund theory assumes wrongly that the demand for labour at any moment of time is perfectly inelastic because the whole of the wages fund is pre-determined by technical conditions and cannot be augmented by curtailing the unproductive consumption on the part of the capitalist producers and is necessarily exhausted in any period. It rests on a fundamental confusion between stocks and flows.4! It assumes discontinuities in the productive process. But wage payments do not ordinarily lead to capital consumption. The later classical economists argued that the wages fund is not fixed even during the short run ‘‘as a unique sum,’ but is rather variable consequent upon the decisions of the nonwage earners to increase or decrease it by altering the amount of their own consumption. Pigou pronounces this argument as *‘plainly fatal.’4* Another objection to the wages fund theory is that its assumption of discontinuities in the availability of food is *‘highly unrealistic’, for the inflow of a great many wage goods is a more or less continuous stream.*t However, any addition to the existing wages fund through capital accumulation tends to bea horizontal addition, and nota vertical one, insofar as the labour force grows pari passu with capital accumulation.*

The wages fund theory loses sight not only of the substitutability between the capital in the wages fund and other forms of capital but also of the factors which affect the rates of profit and saving. It is devoid of an analysis of the reasons why the proportion between the wages fund and the other constituent of the capital] stock is what it is. It does not recognise that the dependence of the wage rate on the wages fund is mainly on ‘‘the more quickly, greatly variable part of the supply of capital, and the way of using the other more enduring, slowly accumulating, and relatively inflexible part of that supply.’4° Marshall is of the opinion that the wages fund theory placed excessive emphasis on the side of demand for labour to the neglect of the causes governing its supply and indicated a correlation between the stock of capital and the flow of wages instead of the true correlation between the flow of products of labour aided by capital and the flow of wages.*’ The advocates of the theory do not make it clear how it is related to the subsistence theory of wages.** In Hutchison’s view, this theory tends to emerge, if it is retained at all, ‘“‘either as a definition, or as a non-sequitur, or, at least, as a platitude.’’*® It is criticised for its pro-capitalistic bias discernible in its stand against increased taxation of the capitalists and against strikes for higher wages. It had a fairly abrupt

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demise.®° There is not much to regret this. However, as Hutchison puts it, ‘‘.... much was lost when the very problem of macroeconomic distribution which it sought to answer was almost completely dropped, particularly because, inthe debates immediately preceding, a number of valuable ideas had been broached.”*? Three ideas arose out of the wages fund controversy: (1) Longe’s sudden rediscovery of the Malthusian concept of ‘‘the generai demand for labour’’, (2) Thornton’s stress on the “‘prospectiveness” of the demand and supply schedules, and (3) Cairnes’ distinction between realised (ex post) and estimated (ex ante) demand and supply as well as his analysis of aggregate general demand and supply, as contrasted with demand and supply of a particular commodity.*2 Blaug asserts that the wages fund theory contains whatever theory of the demand for labour was developed by the classical economists. According to him, the notion that capital is to be understood in terms of a time-interval between production and consumption is implicit in this theory. Therefore, “‘to throw out the wages fund theory in toto is to cut oneself off from the key to the meaning of real capital that it furnished. It was a bad theory of wages, but it had the ingredients of a good theory of capital.**

In the opinion

of another

critic, most

modern

economists

agree

with the conclusion arrived at by the classicists that, when population and technology are given, the average wage rate could be raised only when the capital stock increases. However, they attribute the rise in the average wage rate to an increase in the marginal productivity of labour when it is combined with more capital rather to an increase in that portion of the capital stock represented by the wages fund.** Schumpeter sees two merits in the wages fund theory: One, that it pinpoints that aspect (i.e., the dependence of future wages on present profits) of the question, which is apt to be unpopular and which was very much in the minds of the protagonists of this theory; and two, that it clears up a matter that may worry the careful student, which is as follows: At times this theory has been interpreted to suggest that the elasticity of expenditure on labour with respect to the wage rate is zero (i.e., the elasticity of demand for labour equals one). This interpretation is “not felicitous.” ‘‘In the long run it is not true, and in the short run it is misleading.” The practical diagnosis behind most of the wages fund theorizing, ‘‘even if coarsened for the benefit of the public’, is “‘not more than common sense.” ‘“‘It makes the (real) wage rate and (real) wage income dependent upon the efficiency of the productive process, ‘habits’ (high or low customary standard of living and the rate of propagation), free trade in food and other necessaries, and the rate of saving—all of which was no doubt tailored to the

prevailing

English

situation

but,

onthe

whole,

was

quite

reasonable.” IV. The Minimum.-of-Existence Or Subsistence Theory The classical theory (in its crude,

original form,

to be precise

Demand and Supply Approach in the Classical Theory of Wages

201

considers the natural price of labour to be equal to that wage which provides it with bare or minimum subsistence. This subsistence wage is the wage which just keeps the size of the working population constant. As such, it is a long-run datum. It can be looked upon from either the social or from the physical point of view. Schumpeter deems it more realistic to adopt the former point of view, which refers to that quantity of necessaties and comforts of life which is necessary for the support of the labourer, assuming the nature of the climate and the habits of the country. The classicals had themselves rejected the latter point of view, which is of ‘‘little importance’’ owing to the fact that ‘‘in the matter of wages a huge short run practically replaced the long run.’’®’ The classical economists had discarded the idea of physical subsistence wages as determining the equilibrium price of labour some time before ‘‘the world of dilettante critics” had begun to attribute it to them, as Robbins puts it.°° ‘‘The fact is’, writes Robbins, ‘“‘I am afraid, that to accuse the classical economists, of all people, of defending subsistence wages is

to mistake the period and the school of thought. There was plenty of defence of subsistence wages in the literature of seventeenth-andeighteenth century mercantilism. But it was a conspicuous feature of the classical literature that it explicitly reversed this position.’’®® The classical economists recognised that ‘‘the supply price of labour was essentially a psychological rather than a physiological variable. It was the amount which would induce the labourer to marry and to bring up children rather than the amount which would enable him to do.’’®° As Coats notes, ‘‘The minimum was defined not in physiological

terms,

as

a

sum

just

sufficient

for

survival, but in social

terms, as a customary or habitual minimum.’’*! The minimum-ofexistence or the subsistence level was believed to remain fairly stable for long periods. ‘‘Thus the bundle of subsistence wage goods may require different quantities of labour to produce it at different periods, but it would continue to maintain the same quantity of labour.”’®? The pitfall of this argument lies in the fact that, accept-

ing that wealth should be measured in physical terms and the net revenue which embodies the same number of wage units can maintain the same quantity of labour, the quantity of labour will not represent the same amount of physical wealth to society unless it can

also be assumed that the physical productivity of labour has remained unaltered in the periods under comparison. But this last assumption is rejected by the classicists by arguing that no commodity can serve as an invariable standard of value since it requires different quantities of labour to produce the same cal wealth at different periods of time.**

amount of physi-

The corner-stone of the subsistence theory is the Malthusian law of population, according to which, labour can be produced under conditions of constant cost, the level of this constant cost being the minimum means of subsistence essential for the preservation of an average unit of the working force.*t The special hypothesis underlying the subsistence theory is this ‘‘elaborately buttressed law of population” which pertains to provide it with a scientific support.”

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Moreover, according to this law, every increase in wages above the subsistence level would forthwith induce the workers to have larger families. The resulting increase in the supply of labour would then push wages down to the previous level. Conversely, wages below that level would lead to a reduced supply of labour which would ultimately entail a rise in wages. The supply of labour was assumed to possess perfect elasticity over time, and hence it was not considered imperative to analyse the demand for labour in any detail.®* Whatever the demand for labour, its supply would adjust itself to that demand until wages were equal to the subsistence level. It was concluded therefrom that changes in demand would have no permanent impact on the wage level. The wage-population mechanism was used to demonstrate the perfect elasticity of the supply curve of labour over time, thereby confirming that wages were supply-determined independently of demand.®’ Fer the sake of simplicity the subsistence level was taken to be governed by ‘‘the absolutely necessary subsistence demand by the customs of the people for the maintenance of their life and the propagation of the race.’’®* If the workers readily acquired a taste for additional comforts and conveniences when real wages rose and if population changed only after a considerable time-lag, a new and higher standard of living would result from higher wages. New fertility rates would stem from alterations in social values and mores. The labourers’ concept of what is a minimum acceptable level of subsistence would change. The subsistence theory was thus perfectly commensurate

with

a belief in the secular

tendency

of the going wage to rise

indefinitely.°® Breit has demonstrated that the classical long-run supply curve of labour is not necessarily perfectly elastic at the subsistence level. Since the classical economists held strong views on the economic policy regarding the accumulation of capital as a means of salvation of the working class, it is obvious that they tacitly assumed an elasticity in the labour supply curve of less than infinity.”° But the classical economists were neither unanimous nor consistent individually in their elucidation of this possibility, and ‘“‘it is all easy to judge them by casual remarks divorced from their context.”’! On an average, they accepted the principle that the general wage rate could not be increased substantially unless the workers were enlightened on the urgency of regulating their supply

in the market. ‘‘This too is a conclusion with which modern thinkers would generaily agree, though they would relate wages, not to large numbers per se, but to the effect of large numbers

productivity.’’’2

on

labour’s

V. Critique of the Subsistence Theory The subsistence theory is criticised on the ground that it does not ‘‘specify the actual nature of the adjustment mechanism by which wages fall.’’” What the modern economists find most difficult to swallow is not

the classical statement that capital accumulation leads

to a rise in

Demand and Supply Approach in the Classical Theory of Wages

203

population but the classical statement that the reaction is so swift as to justify our disregarding the supervening stage in which the increase in the wages fund raises the wage rate rather than the number of workers employed. They would normally treat the adjustment of population to changes in the demand for labour as a slow long-run effect, whilst they would regard changes in the demand for labour caused by capital accumulation as swift or sudden.’ The supply of labour takes time to adjust itself to the changed demand for it. Since an increase in real per capita wage income does not increase the birth rate immediately, since it takes a prolonged spell of high per capita wage income to produce a quantitatively significant effect, and finally, since during so long a time new standards oflife develop, the case for the classical long-run theory becomes ‘*really much worse.” The entire conception of a subsistence level of wages becomes ‘‘extremely nebulous’’ once a permanent rise in the standard of living of the working class is accepted as an accomplished fact; and consequently, what has been regarded as “the one fairly firm anchor for the classical account of distribution’ is snapped.”® The Brentano Law invalidates the concept of wages as the necessary cost of labour (which Robertson designates as ‘‘fodder cost’), as conceived by the classicists. Brentano was the first to have marshalled evidence in favour of the reversal of the Malthusian Law and wanted the relevant stretch of the long-run supply curve of labour, for a rise in demand, to be drawn as actually backwardsloping.”®

One important reason why the subsistence theory was much misunderstood is this that the term ‘‘subsistence’’ was ‘‘rarely defined with precision.”” The terms ‘“‘corn’’ and ‘‘subsistence’’ were often used interchangeably, partly because the theoretical analysis was greatly simplified by ignoring price variations between different commodities. But this was pregnant with significant policy implications.” The subsistence theory is alleged to be no theory of wages but to be simply a theorem on the long run or equilibrium level of wages. It is a proposition about the values which certain economic quantities assume in a State of long-run equilibrium. It constitutes only a part of a comprehensive theory of wages.”* During 1776-1848, according to Cannan, this theory gave way gradually to the demand and supply theory; that is, the wages fund theory.”

VI. Concluding Remarks In

sum,

the subsistence theory takes the subsistence

wage as a

norm or datum and therefore does not show how this wage is fixed. However, it admits of temporary, market period oscillations round this wage. Population changes are accepted as the mechanism which ultimately guarantees the restoration of that wage. The supply of labour is generally assumed in the classical theory to be given, during the short run, which is defined to be of sixteen or eighteen years’

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duration. Hence it cannot influence the demand for labour. Thus the demand for labour becomes the all-important factor during the short run. Over time (i.e., in the long run) the supply of labour will adjust,

and

offset

the

influence

of demand.

Therefore,

demand

cannot affect the long-run (subsistence) wage. The wages fund is the concrete measure of the demand for labour. But the wages fund is not always looked upon asa fixed fund but is rather regarded as variable. Thus both the wages fund and the supply of labour (which is taken as co-terminus with the existing population for all theoretical purposes) are subject to change. The calculations of the capitalists to earmark a certain wages fund are open toerrors of judgement and, for a time, there may arise a disequilibrium between the demand for and the supply of labour. Even the subsistence wage is not taken as a constant for all time but is allowed to be under the influence of the standard ofliving of the labouring class. And _ its standard of living is, to some extent, dependent upon the amount of wages, which, in turn, depends on the size of the wages fund. All hang together. In this way the wages fund theory emerges as the real classical theory of wages and is competent to explain wage formation both in the short run and in the long run. Schumpeter points to some opposition to applying the demand and supply analysis to the case of labour on the score that it involved treating human beings like commodities.®° The classical economists were ‘‘indicted for this outrage to human dignity.’’ But Schumpeter is at pains to show that nothing of the sort is, of course, involved in ‘‘this application of the concepts of supply and demand.”’ Even then he adds that ‘‘there was occasionally more in this than a rather cheap emotionalism: the ‘commodity labour’ does present peculiarities that are relevant even for the most matter-offact analysis,’’®! An additional criticism of the theory is that the variations in the price of labour influence all social aggregates but the classical wage theory is a case of partial analysis, which takes as independently given the factors that determine the demand and supply sche. dules.*?

The classical theory relies on adjustments taking place over the life-time of a generation, whereas fluctuations of wages from year to year or between different trades are more important and interesting. Contemporary wage theorists hold that ‘‘the determination of market wages aS against natural wages is often the more important question.’’®8 But for all its within the analytical demand and supply able for any wage particular one.*4

weaknesses the classical theory of wages was, structure of its time, distinctly useful. The apparatus is, as Schumpeter remarks, indispenstheory whatsoever and does not identify any

Demand and Supply Approach in the Classical Theory of Wages

205

References . J.R. Hicks, The Theory of Wages, London, 1963 (2nd ed.), p. 1. LH. Haney, History of Economic Thought, New York, 1936 (3rd ed.), p. 223 and Jan St. Lewinski, The Founders of Political Economy, London,

1931, pp. 97-98. Cannan, A History of the Theories of Production and Distribution (1776-1848), London, 1917, p. 237. - O. Spann, Types of Economic Theory, London, 1930 (English ed.), pul 48. . E.

.

St. Lewinski, op. cit., p. 143.

. J.A. Schumpeter, History of Economic Analysis, London, ing), pp. 663-664. . O. st Claire,

- C. Kerr’s

A Key to RioarJo, London,

paper

in

G.P.

Schultz

1967

(6th

Print-

1957, p. 16.

and

J.P. Coleman

(eds.),

Labour

Problems: Cases and Readings, New Y ork, 1953, p. 262.

. History of Economic Analysis, p. 664. . See E. Roll, A History of Economic Thought, London, 1953 ed., p. 164. . M. Blaug, E:onomic Theory in Retrospect, London, 1968 (2nd_ ed.),

pp. 187-188.

. E. Whittaker, A History of Economic Ideas, New York, 1940, pp. 581-582. . I.H. Rima (ed.), Readings in the Hitory of Economic Theory, New York, 1970, p. 95. Say uses the demand for and supply of labour in the schedule sense. Malthus too represents the demand for Jabour in that sense. See Schumpeter, op. cit., pp. 663-664.

. . . .

Schumpeter, op. cit., p. 663. O.H. Taylor, A History of Economic Thought, Tokyo, 1960, p. 207. Blaug, op. cit., p. 303. OH. Taylor, op. cit., pp. 208-209.

. Rima,

op. cit., p. 95

and

T.W.

Hutchison,

A Review

of

Economic

Doctrines, Oxford, 1953, pp. 12-13.

. Hutchison, op. cit., p. 13, Also, K.E. Boulding’s paper in C,.L. Christenson

(ed .), Economic Theory in Review, Indiana, 1948, p. 68. . Hutchison, op. cit., p. 319.

. L.H. Haney, op. cit., p. 578. . Blaug, op. cit., p. 187. . M. Dobb, Wages, Cambridg2,

1938 ed., p. 108 and R.A.

Lester, Economics

of Labour, New York, 1958 (9th printing), p. 164. . See his paper in Rima (ed.), op. cit. _ w.A. Scott, The

Op.

Development of Economics,

New York, 1933, p. 143.

Cit.. Dp. LOOt.

H.W.

Spiegel,

The

Growth

of Economic

‘ pp. 389-399. >

Marshall notices ‘‘no the marginal productivity has ‘‘no real meaning’ mate the net product we

valid ground”’’ for ‘‘any pretension’’ that theory is a theory of wages. This theory in respect of wages ‘‘since in order to estihave to take for granted all the expenses

of production of the commodity on which a labourer works than his own wages.”

other

This theory ‘“‘cannot be made into a theory

of interest, any more than into a theory of wages, without reasoning

into, 4.circlé,"° In one of his very illuminating letters to Clark in 1900 Marshall spoke of his theory of wages thus: ‘I thought then and think still, that it (the marginal productivity theory) covers only a very small part of the real difficulties of the wages problem: I cannot yet be sure whether you agree with me or not.’’5” Hutchison interprets Marshall’s denial that the marginal productivity theory provides a theory of wages as his admission that it does not of itself bear on the problem of average absolute wages or ‘wages as a whole’ or as the wages fund theory and the Iron Law had endeavoured to do.*®

Value Approach in the Modern Theory of Wages

219

Marshall’s lukewarmness towards the marginal productivity theory of wages (which, according to him, ‘‘contains a part, but only a small part, of the law of wages’’) provokes Stigler to brand this statement as ‘‘misleading’’.6® Marshall is inclined to hold that “wages equal the value of the net product” of labour, and regards this proposition as very important and as containing within itself ‘*the kernel of the demand side of the theory of Distribution’’. There are many a statement in the Principles which seem to be ‘‘an outright capitulation to the marginal productivity theory” but Marshall denies the claim of this theory to be a theory of wages.®° His objection to the marginal productivity theory as a theory of wage determination is based, presumably, on the fact that the theory has nothing to say about the forces governing the supply of factors.6 Moreover, he has what Stigler calls ‘‘a pronounced tendency so to phrase his own doctrines as to minimise the change from the classical tradition.’*®* We may also refer here to a similar remark by Hutchison. ‘‘Nowhere than in his theory of wages does Marshal] make a more strenuous effort to link up with the classical theory and treatment, though, in fact, the classical, mainly ‘macroeconomic’, distribution theory is concerned with quite different questions of distribution than is, for the most part, a precisely and correctly formulated marginal productivity analysis.’** But Schumpeter is of the opinion that Marshall established the marginal productivity theory of wages in England ‘‘succeeding more completely

than he seems to have wished.’’®4 Finally, a word about the place of collective bargaining in Marshall’s wage theory. His wage theory is less rigidly deterministic than the traditional doctrines. It allows more scope for the influence of collective bargaining by trade unions through its effect not only on the efficiency but also on the supply price of Jabour.® In his. earlier work he wrote, ‘‘The power of unions to raise general wages by direct means is never great, it is never sufficient to content succesefully with the general economic forces of the age, when their drift is against a rise of wages. But yet it is sufficient meterialy to benefit the worker, when it is so directed as to co-operate with and to strengthen those general agencies, which are tending to improve his position morally and economically.’’** But his ‘‘extended theory of wages is a mere torso—an examination of one special case where the absence of competition may make the wage bargain indeterminate.’’®’ Marshall was highly philosophical. He thought that all labour was directed towards producing some effect. He defined labour “‘as any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work’. He wanted all labour to be best regarded as productive, except that which failed to promote the aim towards which it was

directed, and so produced no utility.®” and

Marshall thought that the ‘broad lines of division’ as seen by Mill Cairnes had been ‘almost obliterated’. He looked upon the

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Studies in Economic Analysis and Policy in Retrospect

trade

unions

as

an

endeavour at ‘self-government’.

He believed

that as such they encouraged ‘self-respect’ and brought out the business and inventive resources of the workers. He further believed that, alongwith the co-operatives, they raised the stature and the experience of the workers, and thereby they aided not only democracy but also morality. He viewed inter-class vertical mobility of labour with great approval in the following words: ‘‘There is often a social loss as well as a social gain when the children of any grade pass into the grade above them. But it is an almost unmixed gain that children of the lowest class should move upwards. And it is a vast and wholly unmixed gain when the children of any class press within the relatively small charmed circle of those who create new ideas and who embody those new ideas in solid consructions. Their profits are sometimes large: but taking one with another, they have probably earned for the world a hundred times or more as much as they have earned for themselves’’. He lamented that able workers and good citizens were not

likely

to come from homes from which the mother was absent during a great part of the day, nor from homes to which the father seldom returned till his children were asleep.®’ Pigou combined the marginal productivity theory with the wages fund theory.®* Robertson relates the demand for labour to its marginal productivity. But he carefully defines the marginal worker, not as the least effieient worker, but rather as the one who works with the smallest supply of the other factors. This makes it possible to establish wage payments in relation to efficiency and broadly equate wages to the marginal product of the labour employed. However, he considers the connection to be ‘‘quite loose.’’®* Hicks finds only that wage which equals the value of the marginal product of the available labour as consistent with full equilibrium. He shows how the notionof net productivity assumes the methods of production to be fixed, whereas that of marginal productivity assumes them to be variable.” The traditional wage theories are essentially individualistic. At least at the initial level of abstraction they allow no place for collective bargaining. Ata later stage, however, they are generally adapted in such a way as to take account also of trade union activity."1 In the words of Robbins, ‘‘A profound unease and uncertainty dominates the work of the later classical economists when they are confronted with the problem of workers’ combinations.”’”? The pre-Keynesian wage theories neglect the cumulative effect upon the entire economic system of any change in the general wage level or in the total volume of outlay. The demand

and supply apparatus is rooted in the belief that the forces emanating from the buyers’ side are independent of those springing from the sellers’ side. But ‘‘when changes in factor prices compel changes in product demand, and thence in factor prices, once again the independence postulate is violated and, instead interdependence

Value Approach in the Modern Theory of Wages reigns.”’*>

The

position

of the

marginal

221

productivity

functions

depends on what the given level of the supply functions is for the economy as a whole. The relationship between the demand side and the supply side of the labour market is highly complicated.“ The Keynesian revolution has been much more severe in its impact upon the theories of the general level of wages than upon those relating to the rates paid in particular industries or occupations. Keynes rejected the orthodox wage explanation on the ground that its Jabour demand function was based on the assumption that the level of income was given. He argued that this assumption constituted a fatal flaw inthe theory as every change in money wages was capable of altering the volume of employment and the real income position. In the wake of the Keynesian repudiation of the traditional theory the subsequent trend has been to regard the level of money wages as an exogenously determined variable.** Keynes postulates that shifts in the supply side produce inevitably shifts in the demand side of the magnitude required to offset the original change, and, therefore, changes in the general level of money wage rates produce no changes in the real wage rates and in the volume of employment. The demand for labour depends, in part, upon the level of income, which depends, in part, upon the level of employment, which is one of the variables supposed to be determined by the demand for andthe supply of labour. ‘‘So the determination of wages cannot be isolated from the numerous variables responsible for the determination of the level of employment and income.’’”®

In view of the above-mentioned criticisms of the pre-Keynesian theories of wages some contemporary economists, notably Weintraub, have attempted to integrate the aggregative approach of the classicals and the Keynesians with the microeconomic approach of the neo-classicals. They deduce determinate labour demand and labour supply functions free of the constant income postulate,

assuming homogeneous labour.” In the words

of Mrs Wootton, no

new comprehensive theory of

wages had emerged as late as 1955 to take the place of the classical theory which had treated wages on a par with prices. The wage theory was treated on both sides of the Atlantic ‘‘as a special case of the general theory of value.’’ The only change that had taken place was that the competitive theory of wages, like the competitive theory of prices, had been adapted to accommodate the factors associated with the rise of collective bargaining.”* In 1958 Weintraub had regretted that it was not too inaccurate to say that, apart from the theory of interest, the usual presentation in respect of the theories of other factorial rewards was ‘‘not vastly different from the form it achieved at the hands of Marshall.” Many contemporary economists subscribe to demand and supply analysis is applicable to the determination.®® But still many are aware of the lying such an attempt.-Rothschild himself mentions

the view that the problem of wage difficulties underthree limitations:

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Studies in Economic Analysis and Policy in Retrospect

(1) The demand for labour rests predominantly not on its utility to the employer but onits productivity. (2) Labour services are inseparably bound up with the person who supplies them. (3) Certain institutional and behavioural factors have an influence. Lester adds a fourth: Hours of labour cannot, like certain commodities, be stored up and accommodated untila later date when the price is higher. Labour is perishable.*t Pen lists three possibilities under which the demand and supply diagram may prove unusable in respect of the labour market as a whole: Either the curves coincide or the demand curve is to the right (an over-strained labour market) oritis tothe left of the vertical supply curve (unemployment). ‘‘In none of these three cases will the normal forces of the market invoke an equilbrium.’’*? In contemporary the whole

economics

the demand

economy is constructed

with

function for labour in

the real

wage rate

on the

vertical axis and the labour demanded onthe horizontal axis. A rise in the money wage rate over the economy as a whole may or may not be associated witha rise in the real wage rate (and hence with a diminution of the demand for labour). The real wage rate will not rise if expansionary monetary policies and the spending propensities of the public should result in a rise of the price level in the same proportion as that of the wage increase.** It is regrettable that the wage theory has tended through different periods to disintegrate on the supply side. The supply function has tended to be pushed out of the analytical system. The amount of labour supplied and the wage rate at which it is supplied have come to be determined by social customs or by institutional factors. The wage rate has come to be taken as given for purposes of economic analysis. The net result has been that the wage theory has lacked a generally acceptable explanation of the supply side.*4 In 1950 Fellner and Haley in their introductory article to the American Economic Association publication entitled Readings in the Theory of Income Distribution (pp. vii-vili) gave vent to a similar regret, ‘‘Yet at present there exists no satisfactory theory of labour supply for the kind of the economy in which we are living.’’ In contemporary economics it is being felt more and more that a theory of labour supply will have to take into account the institutional circumstances determining the policies of trade unions. Many of the major forces which operate in the labour market are long-run in their effect and admit of flexibility and short-run modification

by institutional action.®®

Institutional

factors render it difficult for

a large proportion of the working population to change its supply of labour whenever the wage rate changes. It is very often not the individual but the family that has to be taken as the economic unit for stipulating labour supply. In that event the likelihood of individual negative supply curves is weakened. Normally, the total Jabour supply curve must increase in response to rising wages when the workers’ minimum wage demands are fairly widely spaced. But the vast majority of workers have to work for a living and hence the

Value Approach in the Modern Theory of Wages

223

total labour supply may fall off with rising wages, though to a lesser extent.°6 The most far-reaching institutional influence on the supply of labour, and hence on wage rates, is produced by the organisations of labour. In contemporary economics cognizance is taken of such factors as commuting time, consumption time, overtime, educational investirent, services of married women, social security, moonlighting, reserve price, minimum wage legislation; income tax, etc., in discussing wage formation.*’ To quote Pen, “*The supply of labour is a matter of human talents, of education and choice of occupation. Here a decisive role is played by environment, social stratification, the educational system.’’§§

One prime determinant

of the behaviour

labour is individual attitudes

towards work,

of the supply curve of leisure

and income.*®

Contemporary economics considers marginal cost, fixed costs and non-crst, non-pecuniary (i.e, intangible) social costs of supplying labour to the market. It considers the income and substitution effects of a change in wages on the supply, of labour services vis-avis enjoyment of leisure.*® In the traditional theory the foregone time is considered to be leisure, which is a desirable employment of time; whilst work (the cost of labour supply) is considered to be the leisure time sacrificed in order to earn wage income. That theory fails to recognise that there exists a range of activities comprising neither gainful employment nor pleasurable leisure. This involves an overstatement of the possibility of a negatively sloped labour supply curve. Such a strictly dichotomous treatment of time has been modified recently in a way that alters the traditional conclusions regarding labour-leisure-wage relationships. It is now held that

whether

arise

in wages

would lead to arise in labour

depends on which of the two effects is the stronger—income or substitution. The standard modern version of the labour supply theory combines the conclusions drawn by Robbins (in his celebrated 1930 article) with those Marshall, supply first increasing and then decreasing with rising wages, and the turning point contingent on the level of economic development and onthe range of tastes and acquaintance with goods occurring at a higher wage, the more advanced an economy is.®!

Summing

up, the forces

which determine

the total supply of

labour in an economy are very complex and by no means wholly economic in nature.°* It can be concluded safely that ‘witha given population, the supply of labour in general will not be very elastic over a long period of time.’’®? In more recent studies the theory of population has been reintegrated with economic theory

and the production of children is regarded deliberate economic choice determined by the and costs, and children are regarded as both and a capital good. But this analysis is neither well-defined, though it is full of promise.” Quite recently Professor Joan Robinson question: What is the unit of Jabour? Her reply

as though it were a balancing of returns a consumption good well-established nor posed a pertinent was, ‘‘We must first

224

Studies in Economic Analysis and Policy in Retrospect

consider how to measure manpower. Traditionally, men, women, and children do different jobs, and their respective roles are different in various societies; this is an important aspect of an agricultural economy... The seasonability of work in agriculture is a serious. problem in reality... We avoid it by supposing that the technique requires a particular succession of operations over a year. Our unit of work, then, isa number of man-hours per year in a particular pattern over the year. This is not very real but it is necessary for the purpose of keeping the model as simple as possible.’ Class war has not strictly followed the path envisaged by the orthodox economic philosophers. Group interests have not been on the ‘‘line of march’ to revolution, nor on the road to universal monopoly and restriction. The present labour market situation is the outcome of an interplay of two contending forces—‘market’ and ‘power’ (state or union). To-day individuals are, of course, still capable of exercising an influence, and indeed it would not be desirable that they should be whittled down to unimportance. But developments have restricted their field of action. Side by side with individuals, indeed above them, the groups which they have themselves created intervene. If these grops do not to-day represent the only economic agent, they do represent an essential one. This has been acknowledged in all countries. Groups act differently from isolated individuals. So far as groups are concerned, it is no longer easy to distinguish between their action ona _ structure and their action within a structure. So long as the labour market was a competitive one, it was easily possible to recognize two types of action. One, the action of those individuals in increasing or decreasing the quantities supplied or demanded and giving rise tO an increase ora decrease in wage rates and, two, the efforts of these same individuals to form unions and thereby reduce competition on the Jabour market, to obtain intervention on the part of the government, and, finally, by these two means, to change the basic structures. As soon as the individuals are replaced by groups, the distinction loses much of its meaning. In their negotiations with the employers’ organizations on a national level, in the presence of public authorities, the labour organizaticns may just as well propose a -change in those institutions which hamper them asa change in wage rates within the framework of these institutions. The two questions are treated in simultaneous and related discussions. The share of labour in the national income can be stepped up by a general wage increase. The workers may press for either.

The labour markets remain ‘balkanized’. The craft is a ‘guild’ and the factory a ‘manor’—skill (re-inforced by union rules) confines movement within the one, and seniority (also re-inforced by union rules) within the other. Consequently, there are many markets, not one; and within any market, the hunt for ‘net advantages’ is not hotlv pursued. ‘‘The dock worker and the carpenter, the employee of General Motors and the employee of Ford live in different orbits. Any movement between them is a source of surprise’. There is no

Value Approach in the Modern Theory of Wages

225

such thing as the labour market, and also no such thing as the wage rate. There are many markets, often only slightly connected with each other and sometimes not at all, and many rates with few of them precisely determined by any market. ‘Wage-structure’, ‘Wagedrift’, ‘Wage-contour’ and ‘Job-cluster’ are more real things, greater home truths, so to speak. The ‘push’ forces count more than the ‘pull’. The growth of specialization has broken up, segmentized, stratified, differentiated, disintegrated the labour market. Mobility is often so difficult that it seems artificial to speak of the (one, aggregative) labour market or the (one, general) rate of wages. There exist an enormous

number of separate labour

individual wage rate. Demands for an labour—seem to be almost non-existent.

markets, each with its

undifferentiated factor—

The factory workers are no longer the under-class. They are part of our inner-society. By comparison, the unemployed, the under-employed and the unemployable caught up in a ‘trap’ at the bottom of our society compose the under-class. This class can rebel but it cannot lead a successful revolution. In the factory, the worker can put on great pressure on its proprietor by withdrawing his labour, whereas this under-class has

little to withdraw

cally, although it can withdraw its votes politically.. character greatly dilutes its effectiveness.

economi-

Its fragmented

Our contemporary society is experiencing another stratification of its classes. As Kerr remarks, the factory is gradually losing its importance to the shop, the office, the class-room, and the research centre. The newer classes are those of the service workers, the white-collar employees, the bureaucrats, the students, the technicians, and the intellectuals, each group trying to establish its own instrumentalities and its own goals.°%* An all-round erosion of authority, ard with it of discipline and code of conduct by all sections is what is the brute reality of to-day.

References

—

. J. Pen, Income Distribution, London, 1971, p. 91.

i) .

S\s

4. 5. 6.

See his paper in P. A. Baran et. al., The Allocation of Economic

Resources,

Standford, 1959, p. 180. gee Wage Policies in the Twentieth Century, Twayne Publishers, 1955, Does: op. cit., p. 664. See Boulding’s paper in Christenson (ed.), op cit., Pp. 67. P. Davidson and E.Smolensky, Aggregate Supply and Demand Analysis, Tokyo, 1964, pp. 175-177.

TamPenw Op. Clie, DP. Laz. 8. In Christenson (ed.), op: cit., pp. 67-68.

Siudies in Economic Analysis and Policy in Retrospect . B.B. Seligman,

Main

Currents

in Modern

Economics, Glencoe, 1963 (3rd

printing), p. 421. . D. J. Robertson, The Economics of Wages, London, 1961, p. 90. . Blaug, op. cit., p. 442. Op. Gifs Peel: PVesternOp eClie Ds lai. . Dunlop’s paper in Dunlop (ed), op. cit., pp. 9-19. . J. R. Hicks, The Theory of Wages, p. 24. . Blaug, op. cit. pp. 432-433. . Pierson’s paper in G. W. Taylor Wage Determination, New York,

ard F. C. Pierson (eds.), New Concepts in 1957, p. 7

. See his paperin H.S. Ellis («d.), A Survey of Contemporary Economics, Vol. H, Illinois, 1956 (Sth prirting), p. 31. . See Introduction by Fellner and Haley in A. E. A., Readings in the Theory of Income Distribution, London, 1950, pp. vii-viil. . R. Perlman, Labour Theory, New York, 1969, pp. 651-52 and Blaug, op. cit., p. 443. . A.L. Meyers, Elements of Modern Economics, Indian ed. Calcutta. 1956, p. 210. Dunlop wants the wage theory to operate with the concept of wage

structure and

employs

the concepts

of ‘job clusters’ and ‘wage contours’

in reformulating a new wage theory. op. cit., pp. 14-15. . Hutchison, op. cit., pp. 315-316.

See his paper in J. T. Dunlcp (ed.),

« Pens, op..cits, pi 842 - Boulding, op. cit., p. 67. . Economics, London, 5th ed., 1955, p. 365.

. Pierson’s paper in Taylor and Pierson, op, cit., p. 7. . . . .

Schumpeter, op. cit., pp. 663-664. Hutchison, op. cit., p. 45.

The Theory of Political Economy, p. 1. See G. J. Stigler’s paper reprinted in Spengler and Allen (eds.), op. cit.,

Pp. 668-669 . Schumpeter, op. cit,, p. 939. . . . .

Hutchison, op. cit., p. 316 and Boulding, op. cit., p. 89. The Distribution of Wealth, London, 1925, pp. 81-82. op. cit., pp. 2, 37, 110-11], 180. Op. cit., pp. 529-532.

36. op. cit.,

p. 533.

. op. cit., pp. 525-529. Also, C.Kerr’s Coleman (eds.), op, cit., p. 263.

paper

in G. P. Schultz and J.R.

. Dobb, op. cit., pp. 94-95. . Hutchison, op. cit., p. 84. Seligman, op. cit., p. 472. . Marshall combines the marginal productivity theory of relative wages and the quasi-Malthusian theory of the level of average aggregate wages. This

40.

draws the following

remark from

Hutchison;

‘‘The

clarity of this passage

might perhaps have been enhanced, along with that of Marshall's whole treatment of distribution, if Cairnes’ clear-out and rigidly maintained distribution between the problems and analysis of aggregate supply and demand, and those of the supply and demand for a particular good or service, as also the distinction between the relative and absolute levels. of the value of goods and services had Deck kept more explicitly before be reader throughout’’, op. cit , p. 85.

Value Approach in the Modern Theory of Wages

42, 43. 44, 45, 46. 47. 48. 49, 50. 51. 52:

227

Op. Cit., Dp. 532. op. cit., p. 850. OP; 2Cit.5\p. 1 Ins

Principles, B.K. 6, Ch. 2, Sec. 4, p. 532. Principles, pp. 573-574, 661.

Principles, p. 577. op. cit., pp. 141-142.

op. cit., pp. 528-529. Op. Git., BK. 6.Ch_2), Secs. 2 to 3s pp. 531-532. op. cit. p. 528. Also, Perlman, Labour Theory, pp. 7-8. op. cit., pp- 518,527. Henderson gives vent to the Marshallian viewpoint when he says, ‘‘The supply of people is not determined by the same kind of influences asis the supply of a commodity. Parents do not produce children for the sake of wages which the children will receive when they go out to work.’’ or, when he says, ‘*Work-people, moreover, do not grow on gooseberry bushes, but must be fed and clothed from the cradle, and their rearing and maintenance represents a real cost which someone must incur.’’ Or, see Samuelson: ‘‘A man is much more than a commodity.” Economics, New York, 1961 (Sthed.), p 612. Marshall’s presentation of the marginal productivity theory of wages is, according to Robertson, intimately bound up with his teaching about the real cost of saving. ‘‘No one who is not prepared to swallow the latter can be expected to be intellectually satisfied with the former.’ See his paper in A.E.A., Readings in the Theory of Income Distribution, London, 1950, p. 227. To quote Seligman, ‘* Whereas for Ricardo labour had been a creative factor and the cost of a good had been rooted in the act of creative work, for Marshall

all this was

transferred into subjective sacrifices.

entirely different it was sey

54, Shh 56. S78 58. 59. 60. 61.

But the latter was an

inquiry—a study of microcosmic states of mind in which

thought possible

to

relate

mathematically

s» all

increments of a

good to small increments in price’’, op, cit., pp. 471, 518, 527. op cit., p. 289. Taylor, op. cit., pp. 374-375. Stigler, Production and Distribution Theories. op. cit. p. 86. op. cit., p. 518.

A.C. Pigov (ed.), op. cit. p. 413. op. cit., p. 84.

Production And Distribution Theories, p. 347. Stigler, op. cit., p. 354. Blaug, op. cit., p. 37. Production and Distribution Theories, p. 63. op. cit., p. 84. op. cit., p. 940. Dobb, op. cit., pp. 94-95, 114. Elements of Economics of Industry, London, J.R. Hicks, op. cit., p. 6.

62. 63. 64. 65. 1892, p. 408. 66. 67. 67a. Principles of Economics. 67b. See his paper captioned ‘‘The Future of the Working Classes”? in A.C. Pigou (ed.), Memorials of Alfred Marshall. 68. op. cit. 69. op. cit. 70. op. cit. WAN B Wootton, The Social Foundations of Wage Policy, London, 1962 (2nd ed.), p. 16.

Studies in: Economic Analysis and Policy in Retrospect

228

The Theory of Economic Policy, p. 110. . Weintraub, op. cit., p. 14.

~N e

See Introduct on by Fellner and Haley in A.E.A., Readings in the Theory of Income Distribution, pp. Vii-viil. . Weintraub, op. cit., p. 108 and H.G.J, Johnson’s paper in Dunlop (ed.), OD NCI siDaol.

. See Haley’s paper in H.S. Ellis (ed.), op. cit. p. 27. . S. Weintraub, An Approach to the Theory of

Income Distribution, Philadelphia, 1958. . B. Woctton, The Social Foundations of Wage Policy, London, 1962 (2nd ed.), pp. 26-27. S. Weintraub, An Approach to the Theory of Income Distribution, Philadelphia, 1958.

. For example, sce (1) K.W. 1954. p. 2; (2) J.T. Dunlop

Rothschild, T/e Theory of Wages, Oxford, in J.T. Dunlop (ed.), The Theory of Wage Determination, London, 1957, p. 14; (3) W. Fellner, Emergence And Content of Contemporary Economics, Tokyo, 1960, p. 259; and (4) J.R. Hicks, The Theory of Wages, London, 1933, p. 1. TOPs Clie Pat. . op. cit., p. 147. Also, Lester, op. cit., pp. 104-125. . Fellner, op. cit., pp. 258-259. . Dunlop in Dunlop (ed.), op. cit., p. 15. . D.J. Robertson, The Economics of Wages, London, . Rothschild, op. cit., pp. 39-40, 46-47.

1967, p. 117.

. Perlman, op. cit., pp. 17-76. Ope citi, p 193% . J.S. Bain, Pricing, Distribution and Cmplo) ment, Indian ed., Calcutta, 1953, p. 554. Also, G.L.S. Shackle, A New }Prospect of Economics, Liverpool,

. . . .

1959, p. 136. Perlman, op. cit., pp. 3-13. Perlman, op. cit,, pp. 7-8. E, Nevin, Textbook of Economic Analysis, London 1960, p. 198. Meyers, op. cit., p. 210. Also, R.G. Lipsey, An Introduction to Positive Economics, London, 1966 (2nd ed.), p. 411: **The over-all supply of labour depends nct only on the size ind age distributicn of the population, but

also on those customs

and

institutions

of a society that determine when

children should leave school and enter the labour force and when retirement

should take place.”’ . See Friedman’s paper in J.F, Burton et. al., op. cit., pp. 8-10. . Principles of Economics.

. See his Paper ‘The Future of the Mcmorials of Alfred Marshall. . J. Robinson

& J. Eatwell,

An

Working Introduction

Classes’

in A.C.

to Modern

Pogou (ed.),

Economics, New

Delhi, 1979. . C. Kerr, Marshall, Marx and Modern Times, Cambridge, 1969.

CHAPTER

THIRTEEN

Evolution of the Classical Theories of Interest and Profits (with reference to the Applications of the Value Approach) The classical economists held a real theory of interest. They simply saw no difficulty in explaining interest per se (Schumpeter). Their theory of the rate of interest is stated in terms of the demand for and the supply of real resources—real savings and real investment. As a thermostat, the rate of interest brings the two schedules into equality or balance or equilibrium; it is a determinant. As a thermometer, it is determined by the interaction or interplay of both schedules, it is a determinate. In the classical theory the rate of interest is invariant to the supply of money. It depends on the value of loanable funds. It is concerned chiefly with the problem of the causes of short-period changes in loan-interest. But the upshot of the theory is that the average long-run rate of interest is constant, and this is known as the dogmatic ‘First. Principle of Faith of the Classical School’

(Patinkin). The interest rate is ultimately determined by the same real forces that govern the rate of profit on capital, for in equilibrium the two rates are equal. The rate of interest on Joans is determined in the long run by the rate of return or profit obtained by the productive employment of capital. In the short run, the interest rate may be affected by other causes, including sudden changes in the quantity of money, the overloading of the loan market by governments in times of war, or an unusual demand for liquidity during a commercial crisis. Over the years, however, the general rate of profit on real invesment and the market rate of interest on loans tend to rise or fall together. For a century the Engiish classical economists did not entertain any fears that new investment expenditure and the growth of the nation’s stock of real capital might be discouraged by a high and inflexible rate of interest (Tucker).

The early classicists like Smith, Ricardo and Malthus made no functional distinction between interest and profit. They thought of

Studies in Economic Analysis and Policy in Retrospect

230

the profit of the businessmen as being essentially a yield on his capital investment. Their profit theory was essentially a yield-onProfit was not a price paid in any capital explanation of interest. market, it was the rate of return per annum generally available on invested capital. The profits of a farmer, manufacturer or merchant, who employed borrowed funds, were reckoned gross of the interest Interest was treated as a secondary income. that they paid out. derived from profits. But a closer investigation shows that profit in the classical economics meant normal profit, which was substantially equivalent to contract interest. But it even normally contained an element that was not interest on capital. Renumeration for work and care of supervising

the

business

was always distinguished.

Reference was

also made to risk, but in the sense of risk of loss of capital, which did not clearly distinguish profit from interest (Knight). Such inclusion of interest in profit by Mill and others before him was opposed subsequently by Bagehot (and Walker). Mrs Robinson and Eatwell urge that the

classical

analysis

was

necessarily dynamic as it was concerned with the accumulation of stock and production of machines. It was concerned with the discovery of the laws of motion of the capitalist economy. The rate of accumulation depended on the size of the surplus in the hands of the capitalists. The effects of technical progress were not considered. Capital was defined as ‘the command over resources which the capitalists use to gain command over labour. .., was... a wage fund’, and a machine was defined as the embodiment of past expenditure from the wage fund, carried forward to a further stage

in production.’

Given

their

interest

in accumulation,

the

concept of capital was germane to the unity of the classicists’ whole conceptual framework. On Eagly’s authority, ‘Capital provided the central scheme or analytical structure that gave a sweeping overview of economic process and provided a mode of analysis that served as the main vehicle for progress in economic theory from 1757 to the end of the nineteenth century.” The comprehensive classical definition of capital included machinery as well as raw materials and labour. One of the leading problems of the classicals consisted precisely in the allocation of the total capital stock between fixed (machines) and variable (raw materials plus a wage fund) capital. At the outset of this (production) process the economy’s total stock of commodities was in the form of capital stock; and at the end of this process the total stock of commodities took the form of fixed capital plus (unmarketed) inventories of commodities. The factor market and the product market were kept apart. Capital accumulation was regarded as precedent to production, and production as prior to exchange of commodities. Or, as Samuelson* *We are summarizing below the traditional theory

of capital

using extensivelly his ideas. ‘As there can be no cat without

can be no capital without interest’.

and

interest

a grain,

so

by

there

Evolution of the Classical Theories of Interest and Profits

231

puts it, capital goods are both outputs and inputs. They can be long-or short-lived. The yield of capital is the interest rate per annum. More future consumption product can be got for by using indirect or round-about methods. The round about processes are more productive than the direct processes. This a technological fact. In other words, capital has a net productivity.** The central idea behind the productivity theory of interest, which represents the borrower’s point of view or the demand side of the problem of interest—-rate formation, is that capital, selfowned or borrowed, by co-operating with labour makes it more

productive: ‘Capital without labour is dead; labour without capital is inefficient’. The net productivity of capital is that market rate of interest at which it would just pay the capitalist investor to undertake it. The market rate of interest screens out investment projects, giving first priority to those that are most immediately productive of the things society wants. Alternatively speaking, it rations out the existing scarce supply of capital goods as well as induces people to sacrifice the'r current consumption and add to their stock of capital.

The demand for capital is given by its net productivity curve. The law of diminishing returns applies to canital. Other things, such as labour, land and knowledge of technology remaining unaltered,

of the

increased stock of capital

goods falls to even lower percentages. kinds of thrift are involved:—

the

net

productivity

On the supply side, two

(1)

Abstinence from consuming more than current income—i.e., continuing to replace capital and abstaining from making net saving become negative, and

(2)

Undergoing waiting--i.e., giving up consumption goods now in return for more such goods available for consumption in the future. Allin all, consumption—saving decisions plus the technical net productivity of capital goods are needed to explain behaviour of the real interest rates over time.

But this explanation has a good many drawbacks. Firstly, it ignores technological disturbance. Inventions may cause a shift of the net productivity of capital schedule and_ stall diminishing returns. Secondly, it assumes perfect foresight and disregards uncertainty and expectations. Investors’ optimism about future yields and risks can change markedly in a very short time. All relations are very shiftable. They shift with changes in population, technology and innovation, opinion and rumour. Thirdly, it overlooks the fact that changes in the level of real income **This idea is implicit in the classical scheme, notwithstanding the disclaimers, and Samuelson is right in incorporating it in his resume.

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Studies in Economic Analysis and Policy in Retrospect

profoundly shift saving and investment schedules at each rate of interest. This omission is a serious weakness of the theory. The advocates of this theory were unware of this because they assumed that chronic unemployment was impossible and that income would not fluctuate.

This criticism deserves a close-up view, which is as follows: The classical theory of the rate of interest is ignorant of the fact that shifts in liquidity preference and open market operations could affect the long-run equilibrium of the rate of interest. It determines the rate of interest in the loan market and forgets that both the loan market and the commodity market are crucially inter-dependent. ‘In some mysterious way” it determines the rate of interest at that level which equates savings and investment and believes in the ex ante equality of savings and investment. It makes no precise attempt to _ distinguish between savings and the supply of loans and between investment and the demand for loans. It gives no account of the people’s decisions as to what to do with their accumulations of past savings. Keynes claims that the inability of the classical system to determine the level of effective demand and of employment is due to an unsatisfactory interest theory. It deals with a barter system and neglects the store-of-value role of money and focusses on thrift (and productivity). It is indeterminate. It determines the rate of interest through the interaction between the savings and investment schedules. But since the position of the savings schedule varies withthe level of income, we cannot know the savings schedule unless we know the income level. But we cannot know the income level unless we know the rate of interest. In the classical theory thriftiness is brought into level with the desire to invest by the interest mechanism so that the desired level of employment gets established automatically. This is challenged by Keynes, who sees in an increase in savings a factor tending to decrease employment. According to him, the equilibrating mechanism of the system is changes inthe level of income, not changes in the rate of interest. The classical theory assumes full employment, which is ensured by the long-term rate of interest. Fourthly, the classical theory is oversimplified. There are more subtle difficulties with the notions like (a) a homogeneous stock of measurable capital and (b) the law of diminishing returns as applied to the net productivity of capital or the degree of round-aboutness of production. Fifthly, its premises, that people (1!) give up current consumption goods, 1.e., waiting and abstinence, (2) transmute them into a greater quant ty of homogeneous stuff, capital, (3) then collect the marginal productivity of such capital in the form of interest, and (4) encounter declining interest rates as more capital relative to labour is formed, are challenged. Lastly, the rich people cannot be said to earn interest by the sweat of their waiting or abstinence.

There is no real cost in it. An abstract quantity of capital does not exist. Hence, its marginal product does not exist. There is no

Evolution of the Classical Theories of Interest and Profits

233

technological way of validating in the most general case the primitive notion that ‘lower interest rates involve more roundabout methods of production’. This is the famous Cambridge controversy mounted in recent years by Mrs. Robinson, Kaldor, Sraffa and Pasinetti. The reswitching paradigm can illustrate their point. There is no technological way to say which method of production is the more time-intensive—i.e., more indirect or roundabout, when the

rate

of

interest is allowed to change.

II According profits

to Catherwood,

attributable

to

Smith,

there

are two

Malthus,

distinct

Ricardo,

theories of

Senior and Mill.

The first is the competitive theory of profits which predominates in the system of Smith. But in his system may also be found the suggestion of the residual theory, which predominates in the explanations of Malthus, Ricardo and Senior. Senior uses the residual theory and humanizes it by the introduction of abstinence. Mill muddles up the residual explanation of profits in his static theory, but in his dymanic theory reverts to the Smithian idea of competitive profits bordering on the value approach. The classical economists centred their attention on the rate of profits enjoyed by employers. Their concept of profits related to the incomes derived from the ownership and management of capital by a group of people known as capitalists. Profit was the income of the owner-manager of a firm. Entrepreneurship and ownership were not separate. The producer bore all the burden of responsibility, uncertainty

and

decisions,

as well as all the financial consequences

(profits or losses) of his policies. The ‘real’ were the property of the entrepreneur.

factors

of production

In the days of the classicals, which were, by and large, days before the advent of the modern corporation, the typical business concern was managed, owned and directed by one man. His reward induced (a) the wages of management, (2) the return on capital, and (3) the gains of entrepreneurship. If wages and raw materials made up the total costs, then all the rest was lumped together as profit. As Fellner sums up, the usual classical concept of profits included wages of management and interest (as well as risk premiums) because the classical economists, with the exception of Say, based their concept on the idea of the owner-manager-entrepreneur. They generally tended to regard profits as the whole residue of national income, after the payment of wages to labourers and rent to land owners. However, there was a side-issue or a cross-current too. In the 1820’s profits were sometimes defined to exclude the ‘wages of superintendence’, though the more general practice of treating the wages of superintendence as a part of profits was defensible on the ground that the labour of the working capitalist, or an undertaker, employing

234

Studies in Economic Analysis and Policy in Retrospect

borrowed funds, was not remunerated in the same way as ordinary labour. The wages of superintendence were not advanced out of capital during the process of production; they were instead received at the end, after the sale of the product, as a part of the profit which remained after all advances had been replaced. Further, the sums received as ‘wages’ by particular undertakers seemed to depend on the quantity of capital at their disposal, and not on the amount of labour they performed, for the labour of superintending a larger capital was not much greater than that required for a small one.

De Vroey has subsumed the classical view on profit into the following passage: Profit is the reward for the advances made by the capitalists to their workers with which the latter subsist during the period supervening between production and disposal of their produce. Its level depends on the consumption habits of capitalists. These habits determine the amount that are ableto invest in the wage fund and the price at which they remunerate tir

work-force.

In this sense profit is a payment to the rentier financiers, pure and simple. It is in no way different from interest—a relic of usury, so to speak.

The traditional theory largely ignored the institutional character of profit. In tackling the value problem it faced the question as to how to find the pattern of prices that corresponded to a uniform rate of profit on all the capital engaged in production. The rate of profit was given by the ratio of the amount of profits obtained ina year to the amount of capital from which they were derived. Finally, there was recognition of the tendency of profits to fall as society advanced, or better, fall to a minimum as an inevitable consequence of social progress and an established economic law. Ill.

Adam

Smith

In Smith’s book the real value of a commodity resolves itself into three component parts, viz., wages, profits and rent. Wages, rent and interest are all determined by demand and supply in the same manner as are commodity prices. The term ‘interest’ is employed by Smith as a payment made for the use of borrowed funds. The revenue derived from stock by a person ‘who does not employ it himself, but lends it to another, is called the interest or the use of money’. It is the compensation which the borrower pays to the lender ....’.

Having first regarded capital goods as the product of the saver, Smith next regards any net yield of these capital goods as being inthe nature of a payment for the service rendered by the saver either to the producing unit or to the exploiter alone. Schumpeter says that this approach partakes of the character of the abstinence theory of interest. Apart from being the precursor of the abstinence notion, the introduction of the connection between time and productivity by Smith is a forerunner of the idea that

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capital has productivity—an idea which was still-born many a time (even Mil) labelling it as ‘delusive’) and had to wait for the fulness of time to be able to survive. Smith goes on to propound that the rate of interest tends to be low in rich countries and high in poor countries. In his estimate, the minimum of interest ‘must be something more than sufficient to compensate the occasional losses to which lending, even with tolerable

prudence,

is exposed’.

Smith.

remarks,

‘Interest’

falls as the

quantity of stock to be lent increases, because profits diminish as it becomes more difficult to find a profitable method of employing new capital’. Schumpeter mentions Smith’s unconvincing explanation of the tendency of the rate ofinterest to fall owing to the increasing competition between increasing capitals. Smith was responsible for introducing the notion that the rate of saving depends on the interest rate, and that savings are always immediately turned into invesment. According to him, a rise in the rate of interest brings about an increase in the accumulation of capital because people of means, at least, would be prompted to spend less and save more. Thus the rate of capital accumulation (i.e., savings) is a function of the rate of capital formation. It did not occur to Smith that only among a very frugal race would the men of means be prompted to cut down on their consumption because the interest rate had increased half a point or a point. Nor did Smith envisage that such a frugal race might

save

even

more

if the

interest

rate

were

low, and there-

fore their income from capital loans would be less (Finkelstein Thimm).

and

Haney says that Smith is fairly consistent in using the word ‘profits’ to indicate the return on capital—that is, what ‘can be made by the use of a capital.’ He defines profits as the return to the capitalist after the primary deductions of wages and rent. The revenue derived from stock by a person ‘who manages or employs it, is called profit.’ Whether or not he views profit as a residual or surplus when he regards it as _ price-determining is extremely difficult to say. All the same, profit is that part of the value of a good which the capitalist appropriates to himself after he has paid the wages of his workmen. The physiocrats regarded _ profit as a deduction from rent, Smith regards it as a separate form of surplus, distinct from rent. To reproduce his own words, ‘Part of (that) profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit’. Smith notes that the residuary concept of profits includes nct only the income arising

from the ownership of capital as such but also an insurance against risk and a reward for ‘the trouble of employing the stock’. The grcss profit incorporates a compensation for bearing the risk of loss and a surplus for the entrepreneur. Net or clear profit is the surplus alone, the net revenue of the businessman. Gross profit minus the compensation for the risk of loss equals net profit of the capitalist.

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Smith makes the size of profits hinge on the size of the total stock which the capitalist employs. Profits of stock are different from wages as regards their origin. As said above, they are not to be conceived of as a payment for a special kind of labour, namely, the labour of inspection or direction because they bear no relationship to the disutility of the labourer—his ‘toi] and trouble’ or ‘pain’—a real cost. Smith insists thet profits should not be mixed up with the wages of management. The wages of management vary with ‘the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction’. Smith admits the difficulty of speaking of an average rate of profits because profits are subject to great variations of time, place, and type of business. But if there is such a rate, it can be ‘natural’ with respect to the time and place in which it prevails. The idea of a minimum profit rate is not clearly worked out by Smith. Simith argues that the increase of capital tends to depress ‘average profits’, the rate of return obtained by employers after the deduction of rent and wages, in two ways, viz., (1) By forcing producers to sell more cheaply and (2) by raising wages. He thinks that the rate of profit will fall because of growing competition among entrepreneurs, and he welcomes this development. The consumers will be the gainers, after all, and he is their champion. In this enunciation we can notice the germs of the value approach to the distribution problem. Profits in the Smithian system are competitive profits, determined by the composition of the owners of stock. The effects of their competitive efforts are modified by the quantity of stock in existence. Smith believes that in a progressive state stock increases so rapidly that the rate of profit does not increase, that in a stationary state stock has reached a saturation point and profits are low and that in a declining state the amount of capital decreases without a corresponding decline in the need for it, and the owners of stock experience their golden age with the existence of high profits. Smith concludes that generally wages and profits are inversely related. An increase of stock, by increasing competition among its owners, tends to lower profits. On the other hand, it increases the demand for labour and thus tends to raise wages. In Smith, ‘excepting the case of the mere lenders (‘‘monied men’’), there is no distinctive function of the entrepreneurs— though Smith does speak of the ‘‘undertakers’—or industrialists, who, “‘inspection and direction” being brushed aside, are fundamentally capitalists or masters ‘‘setting to work industrious people’’ and appropriating part of the product of ‘‘their work”. Occasionally, Smith marks profit off interest. Profit, treated as the basic income of the capitalist class, is (substantially) the return from the use in business of physical goods (labour’s means of subsistence included) which that class supplies; and interest on loans is simply a derivative

Evolution of the Classical Theories of Interest and Profits

237

from it. Smith makes interest on loans ‘a derivative revenue’ derived from and depending for its magnitude on the ‘profit’ which can be got by the actual employer of capital whether that capital is his own or only borrowed. He views interest as a proxy for profit. According to him, the proportion of interest to profit rises and falls with the rate of profit: ‘‘. . .the ordinary profits to stock must vary with it (the usual market rate of interest), must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit’. This is a point to which we shall return shortly.

To quote Schumpeter, ‘So far as Smith can be credited with having had atheory of ‘‘profit” at all, it must be pieced together from indications, mostly vague and even contradictory, that are scattered over the first two Books’. Two explanations run side by side. Ekelund and Herbert adjudge Smith’s discussion of profits per se as unsatisfactory by contemporary standards for the simple reason that he offered less a theory of profit determination than he did insights into the profit-making process and added certain obiter dicta to the concept of profit (and of interest). Schumpeter is emphatic that Smith had no productivity theory of profit. ‘But, all the same, he offered an explanation

of what

he,

like everybody else, took to be the indubitable tendency of interest to fall that most naturally follows from a productivity theory, namely, that the rate of profit tends to fall as increasing capitals enter into competition with one another’. Schumpeter doubts if Smith held an exploitation theory of profit, though it can be said that he suggested it. For he also stressed the element of risk and spoke of employers’ advancing ‘the whole stock of materials and wages’.

Predicating the division of net revenue into rent and profits upon the distincticn between land and capital in Wealth of Nations Smith presumably says that ‘high profits will eat up rents’ and avers that the reward to capital is a real cost, which must be paid to elicit or maintain the supply. In the same passage, he distinguishes between profits and interest. The fermer is the reward to ‘stock’ or capital, the latter the price paid for borrowed money, i.e., for loanable funds. He perceives the danger that stems from the common use of the word ‘profit’; yet he continually speaks as though profit is largely cr entirely interest, or, at least, interest together with a payment fcr the risk to which the employment of capital is subjected. Again and again, he refers to the ‘‘prcfits of stock’. But he does not neglect risk.

Smith regards interest as a part of profits. It is derived, hand as it were, from the

undertaker

to whom

a loan

has

second been

made. It is ‘a derivative revenue’, to employ Cannan’s phrase. Smith makes it clear that the interest that the borrower can afford to pay is in proportion to the net or clear profit only, and the rate must generally be lower than the rate of profit in order to induce

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borrowing. To put the same in other words,

Smith

maintains

the general rate of profit governs the rate of interest,

that

that

is, the

price that producers can offer for loans. In still other words, the rate of interest is governed by the rate of profits. Smith believes that the average rate of profit would be in the neighbourhood of approximately double the rate of interest on well-secured loans. Evidently, he thinks that interest varies more than does the remuneration of superintendence and risk. The best clue to profits is the rate of interest. which rises or falls with profits. The rate of interest must always remain below the rate of net profit. Thus Smith appears to be suggesting that, in the measurement of aggregate, profits, interest ought to be viewed as a proxy for profit. Finally, he thinks that raising the rate of profit might have the consequence that savings would diminish. IV. Jean Baptiste Say Say bemoaned that Smith confounded the profits of superintendency and those of capital under the general head of profits of stock, and ‘all his sagacity and acuteness’ were scarcely sufficient to expound the causes, which influence their fluctuations. Such being the case, Say stated entirely different principles that regulated their value: ‘‘The profits of labour depend upon the degree of skill, activity, judgement, etc., exerted, those of capital on the abundance or scarcity of capital, the security of the investment, etc.”’ According to him, the interest paid by the borrower to the lender of capital was composed of the rent of capital and of the premium of insurance against the risk of its partial

or

total

loss,

but it was ‘extremely difficult to sever and distinguish these ingredients’. Say divided capital into disposable or loanable capital

two

and production capital. Only the former influenced the interest rate; the latter could not affect the supply of the former. He formally made interest a matter of the supply and demand for what he

called disposable or loanable capital: ‘The

more

abundant

is the

disposable capital, in proportion to the multiplicity of its employments, the lower will the interest of borrowed capital fall’. He also advanced the idea of risk and liquidity factors as influencing the interest rate. He said that risk was involved in the advance of loans. Fluidity (that is, the degree of recall) partly defused the risk factor. He recognized that the interest obtainable on loans was quite different from the returns yielded from old investments of capital. We have thus in Say the first indications of the use and

productivity theories of the rate of interest.

Say originally used the term ‘profit’ differently, insisting on a separation of profit from interest and defining the former explicitly as a wage. Later, he included in profit the reward for risk-taking. Formerly he had viewed this income as one accruing to the capitalist as such, but subsequently he transferred it to the entrepreneur.

Evolution of the Classical Theories of Interest and Profits

239

He noticed that the profit that was expected to accrue from capital investment was an important factor in explaining the demand for loans but he kept profit and interest distinct. He drew a distinction between the profits of industry and the profits of capital. The former included the wages of common labour and the remuneration received by those who followed scientific pursuits as well as ‘the profits of the master-agent, or adventurer, in industry’ that is, the reward of the business organizer for all labour put into his enterprise. In order to earn the former a man must have access to capital, besides certain personal qualities required for successful management. The latter were, in the main, interest but also included an element of risk. But risk was common to both. Returns from various employments tended to be equalized in the long run but in the short run considerable disparities might ensue. Say appeared to be signalling towards a demand—and—supply (which is the same thing as the value) approach with regard to profits. Thus, the rate of profit is determined by ‘the relative demand and supply for each mode of employment of capital respectively’. Added to this approach is the thought of the fruitfulness of roundaboutness of production, which is central to capital: ‘Theory, therefore, leads to the presumption, which is confirmed by the test of experience, that the profit of capital is high, in proportion to the hazard of the adventure and to the length of its duration’. Alongside this anticipation Say hints at the scope of a divergency between private and social interests in the diversion of capital: ‘To the capitalist himself, the most advantageous employment of capital is that, which with equal risk yields the

largest profit, but what is to him most beneficial may be so to the community at large...’ V. David

perhaps

not

Ricardo

After Smith, Ricardo suggests that ‘undoubtedly if the market rate of interest could be accurately known for any considerable period, we should have a tolerably correct criterion, by which to estimate the progress of profits.” But his perception is more perva- sive. Heremarks that although the rate of interest is ‘ultimately and permanently governed by the rate of profit’, wh ch is made by the employment of capital, yet it is subject to temporary variations from other causes, such as the quantity and value of money and government loans. The fixed and legal rate of interest may differ considerably from the market rate. He advances the theory that the interest rate tends to settle down to a level which the marginal entrepreneur would accept rather than relinquish the advantage to be derived from use of the last increment or unit of capital which he contemplates adding. Ricardo followed Smith in speaking of profits as the paneof stock’. But, except for this identification of profits with interest, his treatment was very different from Smith’s. He made his theory

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of profits an integral part of his distribution theory. In his distribution theory the capitalist is sandwiched between two mill-stones, namely, the landlord and the worker. Ricardo in his Principles normally treats profit as a real cost, which must be paid to maintain the supply of capital, although at times it is treated asa residual like rent. Whatever the confusion in the Principles, in his celebrated ‘‘Essay on Profits”, Ricardo. clearly defines profit as the return to capital and its organization in production, i.e., its combination with the other factors.

In Ricardo profits originate from the productive power of Jabour. They emanate from the ability of labour to produce more in a given

period than the amount necessary to cover wages and the replacement of capital. Ricardo considers capital in the sense of advances to labourers. Profits depend on an excess of the product over these advances: ‘A certain quantity of labour is necessary to obtain the whole produce, and profits depend onthe proportion of the whole quantity which may be necessary to provide the labourers earnings, the rest only is profits.’ Ricardo regards his theory of profits as an alternative to that provided in Smith’s Wealth of Nations. He expatiates it as a corollary of his theories of wages and value. He is not very much precccupied with profit as a ratio to total capital. His prime con-

cern is the determination of total profit or profit as a proportion of any given value produced (and hence as a ratio to wages).

Ricardo’s proposition that profits depend on the value of wages is quite true of total profits, or of the amount of profit yielded by any given value of total produce. In his mode the rate of profit on capital isthe ratio of corn profit to the stock of corn (Mrs Robinson and Eatwell). In Principles he determines the rate of prefit in the economy asa whole exclusively by the cost of production of wage goods for the simple reason that wage goods enter into the production of all goods, while non-wage goods or luxuries do not. When real wages are given, the share of profits in net output is determined, as Ricardo sees it, by technical conditions in the production of wage gocds. According to him, the rate of profit in agriculture, which produces the means of subsistence (corn or wheat) for the workers, determines the rate of profit throughout the whole economy. Ricardo disregards rent from the point of view of a theory explaining changes in the rate of profit. The income arising from marginal investment (the last ‘dose’ of labour and capital) is divided simply into profits and wages. To him, profits are total product minus, the sum of the rents and wages paid to the cooperating Jandlord and his labourers. He simplifies the problem still more by directing attention to the no-rent or marginal lands and the no-rent application of capital, thus eliminating rent from the calculation and explaining profits as the product of no-rent land

Evolution of the Classical Theories of Interest and Profits

and no-rent labourers.

capital

minus

the wages

paid

to the

241

co-operating

Ricardo bases his theory of profits on a relatively small of assumptions, most of which were widely accepted by economists of his time. He assumes that the amount of no-wage) capital used in conjunction with a given amount labour remains the same.

number English fixed (or of direct

Ricardo infers that ‘profits in fact depend on high or low wages, and on nothing else.” The level of wages tends to be higher, the more rapidly capital is accumulated. The supply of labour regulates itself accordingly and thus offsets the effect—it increases in the same proportion as capital, and, ceteris paribus, there is no further rise of wages or fall of profits. Ricardo takes the institution of profit for granted, and devotes himself to the analysis of ‘permanent variations in the rate of profit’ and of the impact of profit on value. He makes the prices of produced commodities (as distinguished from scarce commodities) depend on the rate of profit. The prices of produced commodities must pay both the wages expended on their production and the required profits on the stock.

In the Ricardian model, since the rate of profit per annum is simply the amount of profit earned per annum divided by the value of the investment required for production, the share of profit in the value of output of various commodities varies with the value of the investment necessary to employ a man in producing them. At a given uniform rate of profit, a commodity with a higher value of investment per man-will have a higher share of profits. Thus, the pattern of relative prices turns on the rate of profit. The profits of particular producers might be temporarily affected by the state of demand, and hence by the prices charged to the consumers. But comparatively low profit in some industries, caused by over-production of those particular commodities, are balanced by comparatively high profits in others. Over-production can never affect all industries at the same time. Ricardo demonstrates how competition tends to establish a uniform rate ofprofits, by attracting capital into channels which yield a rate above the average and repelling it from those in which profits are below the average.

Ricardo claims that the question whether the diminution of capitalist consumption is temporary or permanent has in itself very little to do with the determination of the rate of profit realized on the greater capital. He agrees with Malthus that in the short run, until population has increased in proportion to the demand for labour, the accumulation of capital would tend to augment wages and depress profits. But inthe long run this factor is unlikely to be important. Given the fact that labourers receive as wages only a portion of the whole produce, leaving an amount of

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commodities as profit to their employers, Ricardo can see no palpable reason why in the progress of accumulation, the entire increment in this profit should not be reinvested each year. He takes it for granted that ali rent would be consumed, while the greater portion of profit would be saved and reinvested. From the foregoing it follows that Ricardo regards profits as the principal source of saving. Saving is identical with investment. The growth of capital is assumed to cause a more or less proportionate increase in the demand for labour. A fallin the rate of profit leads to a slackening cf the growth of capital. Ricardo and his followers do not agree with Smith and conclude that capital accumulation, however rapid, will not cause a decline of the rate of profit directly, simply by increasing the supply of capital seeking employment and commodities seeking a market. However, they hoid that the accumulation of capital must depress profits indirectly, by pushing up wages—temporarily, because ofa shortage of labour, or permanently, because of a growing scarcity of fertile land and a rising cost of producing corn for the labourer’s consumption.

Ricardo was concerned that ifprofits fell, the power and motive of the capitalist to accumulate would be arrested. The rise of wages and fall of profits would have two important effects:— (1) Capitalists would be encouraged to employ an increasing proportion of their new savings in the construction and employment of machinery, as a substitute for manual labour. In this sense the fall of profits and the increasing use of machinery in place of labour would be treated as joint consequences of the growth of capital and population. (2) The power and the will of the community to add to its capital would be reduced. If all savings were from made profits, and the rate of profit on capital fell, the continued growth of capital at a constant percentage rate would presuppose a willingness on the part of capitalists to accumulate an increasing proportion of their profits each year. If only the same proportion were accumulated, capital would grow at a declining percentage rate. After a certain point, in response to the falling inducement to save, capitalists would alter their plans in favour of personal consumption. They would accumulate a diminishing proportion of their incomes.

Before

the

rate

of profit

fell to

nothing, accumulation

would cease altogether. to fall was counteracted

Unless the tendency of the rate of profit in some way, its effects on the ability and

incentive of capitalists economic growth.

to save

would

set an

ultimate

limit

to

As a sequel to the correspondences between Malthus and himself, Ricardo was finally forced to admit that capital added to the value of a commodity, and that profit, therefore, was more than a payment for embodied labour. In the chapter on profits Ricardo

yolution af the Classical Theories of Interest and Profits

243

seemed to abandon the idea of capital being rewarded on the basis of past labour. He spoke as if the return accruing to ‘stock’ or capital were a residue of the product, after wages and rent had been deducted. There isa solitary hint in Ricardo that capital goods might require a remuneration in excess of that corresponding to the labour incorporated in them, to compensate for the waiting undergone. As P. Sraffa’s new venture has amply shown, Ricardo had a repugnance to the suggestion that capital possessed productivity apart from labour (which fact was reiterated by Mill in his summing up of the Ricardian position), and it was only ‘after considerable intellectual struggle’ that he admitted that capital was an indepen‘dent source of productivity—this concession being his swan-song, © so to speak. On this we may profitably quote Robbins, ‘Adam Smith, in a vague

way, explained

fluctuations in the rate of profits

as contingent, other things being equal, on fluctuations in the rate of accumulation, the whole analysis being simply a generalization of the elementay phenomena of the market for funds. Ricardo, starting from the conception of profit as the leavings of wages, asked why ‘as a percentage it should ever diminish if it were not for some influence causing wages to increase without any proportionate increase cf the product to be divided. He was thus led to his well‘known view that profit as a percentage of total product minus rent was governed by the cost of producing wage-goods at the margin cf agricultural cultivation—with its corollary, based on the law of Diminishing Returns, that save for the accidental effect of in‘venticns, there was an inevitable tendency to a declining rate of profit as population tended to increase’. Rima is of the opinion that Ricardo was less concerned with presenting a functional explanation of profit than with explaining its future trend in relation to economic progress. He did not address himself to the question as to whether some minimum rate of profit was necessary not merely to continued growth, but also simply to ‘stimulate the capitalist into continuing to perform his function within the framework of the stationary state. We have no answer from him whether the profit residuum would eventually disappear altcgether, or whether its presence insome minimal amount was essential to the continued existence cf the system. Profits must fall: ‘The natural tendency of profits then is to fall; for, in the progress of seciety and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labour.’

‘The rate of profit would fall because of the increasing difficulty of growing

food

for

an

expanding

population,

and

this

Ricardo

deplored. Falling profits would arrest the accumulation and investment of capital, and ultimately the stationary state would ensue. Ricardo suggested “This tendency, this checked at repeated connected with the

an escape from the tendency of profits to fall: gravitation as it were of profits, is happily intervals by the improvements in machinery, production of necessaries, as well as by the

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discoveries in the science of agriculture which enable us to relinquish a portion of labour before required, and, therefore, to lower the price of the prime necessity of the labourer. He contended that technical changes could only drive up the rate of profit indirectly by causing a reduction of the proportionate share of wages in the income arising from marginal investment. He concluded that there was no way to keeping profits up but by keeping wages down. Thus in Ricardo wages and profits are in perpetual conflict. VI.

Thomas Malthus

Robert Malthus refers to

the rate

of interest, with causes for its being

high or low, in countries like India and China, in England and Italy, and that is all about it in his Principles. But diffused in his. writings we see the ingredients of the productivity theory of the interest rate in the sense that interest is a price paid for the productive services of capital by way of production of wealth. Malthus defines profits as ‘that portion of the nationai revenue which goes to the capitalist in return for the employment of his capital’. The prcfits of capital consist of ‘the difference between the value of the advances necessary to produce a commodity and the value of the commodity when produced.’ Apparently, without realizing it, he makes advances almost identical with the entrepreneurial cost of production, and, consequently, inclusive of wages and rent. As he sees it, profit is limited by the size of the marginal product and regulated by variations in the value of the produce. As society advances, the size of the marginal product diminishes because of the necessity of resorting to the use of inferior land, but the wants of tue labourer do not change. Profit is thus a residue of the marginal joint product. The value of the produce is caused to vary by changes in the supply of capital.

Malthus argues that ‘the rate of profit is determined by the quantity of accumulated capital compared with the demand for the products of capital.’ The increase or decrease of capital may affect the rate of profit by altering the supply of commodities in relation to the wants of consumers, or ‘the natural desires of man, which are after all the foundation of all demand.’ Important fluctuations in the rate of profit are ascribed by Malthus to the discrepancy inthe rates of supply of labour and supply of capital. The rate of profit depends ‘mainly on the demand and supply of stock compared with the demand and supply of labour, and very little (directly) on facility or difficulty of production, properly so called.’ This is tantamount to the typical value approach of the classical economists as intended to be extended

to the distribution problem. Malthus argues that Ricardo had considered almost exclusively only one of the possible causes of changes in wages and profits, namely, the declining productivity of land, at the expense of another

Evolution of the Classical Theories of Interest and Profits

245

important factor, ‘the proportion which capital bears to labour.’ So Malthus believes that for periods of moderate duration, variations in the demand for labour inrelation to its supply are capable of Bierce pront

important

effects on

wages, and

hence

on

the rate cf

In the 1836 edition of his Principles Malthus writes, ‘‘Profits, indeed, and interest, had always been and must always be estimated by proportions; but wages had always been, and always should be, estimated by quantity, either by the quantity of money which the labourer earns, or by the quantity of the necessaries and conveniences oflife which that money enables him to purchase. Consequently, according tothe ordinary and most correct language of society, we frequently see high profits and high wages, low profits and low wages going together; in using which expressions, high and low, as applied to profits, always refer to their rate or proportion, and as applied to wages, to their guantity or amount’’. When it came to ‘the quarrel over the spoils’ (Buchanan’s phrase) between the masters and their men, Malthus agreed with Ricardo. In his article of 1824 Ricardo affirmed that ‘Of all the truths which

and important the whole

Mr Malthus

has

established,

is, that profits

produce

one of the most useful

are determined by the proportion of

which goes

to

labour.

It is, indeed, a direct

corolJary from the proposition that the value of commodities is resolvable into wages and profits. But it is, however, only one important step in the theory of profits, and Malthus goes on to attempt to prove that labour’s share of the spoils is determined not so.much by the employers’ demand for labour per se, when compared with the supply of it, as by a rising or falling demand for the products of labour (P. James). Malthus ended up in an agreement with Ricans in respect of the temporary effect on profits of a relative scarcity of labour. He argued that accumulation depended on the prospect of the enjoyment of higher standards ofliving in the future. He claimed that a fall of the rate of profit caused by ‘a passion for accumulation’ would be accompanied by low real wages and unemployment. There were two ways in which accumulation might affect profits: (1) By increasing the supply of goods in relation to consumers’ demand, and thereby influencing the conditions of sale, and (2) by increasing the demand for labour in relation to its supply and so augmen‘ing the rate of wages. If the rate of profit declined, the power and will to save

power

of accumulation

and

the motive

or

the

to accumulate would be

reduced. Higher wages drive down profits by stepping up the cost of production. Malthus defined the rate of profit carefully to show that ‘it varies with the variations of the value of the production’. Like Smith, he felt that for all practical purposes the question of

changes in profits should be discussed in terms of ‘the principle of competition or of demand and supply’.

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Vil. NaseauiWillainisenier Senior regretted that capital had been so variously defined that it was well-nigh doubtful whether it had any generally received meaning. So he defined capital as composed of natural materials, labour and abstinence. He tied up his ideas on capital and interest with his wage fund theory and the outcome was that they were not always easy to follow. He brought up abstinence as another agent of production: ‘Labour and Nature are the only primary productive powers but they require the concurrence of peAbSincuces to give them complete efficiency’. According to Senior, interest accrues on saving. Every act of saving involves abstinence from consumption—which is asacrifice and hence has a real cost. But not every act of saving involves abstinence.

abstinence

Rather,

does

those,

not

who

can

entitle the saver

save,

save.

Besides,

to interest.

For

mere

receiving:

interest another ancillary act has to be performed. The saver must lend his saving to some person or institution, who will pay him some interest in return. Moreover, Senior’s abstinence theory of interest ingores the demand side. Why should the borrower be willing to pay interest? In addition, the abstinence theory of the rate of interest is ‘not a complete theory’. It is ‘merely a theory of supply of savings and does not explicitly relate thriftiness to the demand for investment based upon productivity’. But this critique is not unexposed to a rebuttal, for from her thorough study Marian Bowley deduces that ‘Senior’s theory of capital and interest was thus based on an explanation of the demand for capital due to the peculiar productivity of capital, and of the supply of capital in terms of the real cost of saving’—which is expressed by ‘abstinence’ which tends to make his explanation analogous to the value approach. In spite of these shortcomings, the abstinence theory of interest is ‘more than a piece of crude apologetics’. In essence and in effect, it is ‘simply a logical deduction of the view of capital contained in the classical wages fund doctrine’. If capital consists principally of ‘advances’ to workers, the rate of interest is the reward for those who can afford to lend present wage goods in return for future wage and non-wage goods. To

Senior,

‘Profit

is the

remuneration

of

abstinence,

and

abstenence is the deferring of enjoyment’. By ‘abstinence’ Senior means restraining or refraining from current consumption in order to accumulate capital, or ‘intermediate’ goods. This is the key to his third postulate: ‘That the powers of labour and of the other instruments, which produce wealth, may be indefinitely increased by using their products as the means of further production’. Like labour,

abstinence

is disagreeable. Again,

abstinence,

like labour,

increases in supply in response to higher remuneration. It ‘stands in the same relation to Profit as Labour does to Wages’. Furthermore, ‘As Capital continually tends to approximate to Land, so does’ Profit to Rent’. This is so bécause of the influence of F. B. W.

Evolution of the Classica! Theories of Interest and Profits

247

Hermann on Senior. Senior was over-inclined to include land in capital with a view to getting over the difficulty of deciding what was rent and what was profit. Profit is essential in order that saving might be aageed But Senior argues at places that savings are a matter of habit: ‘Capitals are generally formed from small beginnings by acts of accumulation,

which becomes in time habitual. The capitalist soon regards the increase of his capital as the great business of his life, and considers the greater part of his profit more a means to an end than asa subject of enjoyment’. Senior appears to have succumbed to the Ricardian notion that wages and profits are at loggerheads, for his assertion that ‘the whole net profit is derived from the last hour’ of work done by labour has no express purpose other than to allude to this.

VIII. John Stuart Mill Mill determines the rate of interest by the demand and supply of loanable funds—the first attempt at a systematic application of the value approach. The demand for loans consists of investment demand plus government demand plus landlord demand for unproductive consumption. The supply of funds is made up of savings plus bank notes plus bank deposits. The rate of interest is subject to alteration due to changes in the demand and supply of funds, independently of the rate of profit. Both lendings and borrowings are in perfectly elastic supply: ‘There is, therefore, a large class of persons who are habitually lenders. On the other hand, all persons in business may be considered as habitually borrowers’. To cite from Mill’s Essays, in extenso:

‘The amount of borrowers being given, (and by the amount of borrowers is here meant the aggregate sum which people are willing to borrow at some given rates) the rate of interest will depend upon the quantity of capital owned by people who are unwilling or unable to engige in trade. The circumstances which determine this, are, on the

one

hand,

the

degree

in which

a taste

for

business,

or an

aversion to it, happens to be prevalent among the classes possessed of property; and, on the other hand, the amount ofthe annual accumulation from the earnings of labour. Those who accumulate from their wages, fees, or salaries, have of course, (speaking generally) no means ofinvesting their savings except by lending to others: their occupations prevent them from personally superintending any employment. ‘Upon these circumstances, then, the rate of interest depends, the amount of borrowers being given. And the counter-proposition equally holds, that, the above circumstances being given, the rate of interest depends upon the amount of borrowers’ (Essays).

Mill notes that there is a minimum supply price of capital, i.e ‘a rate which the average person will deem an equivalent for

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abstinence’. This ‘mankind becomes future objects’: the are to supplement savings.

rate tends to fall with economic progress because more willing to sacrifice present indulgence for larger the annual output, the less anxious people current consumption by drawing on accumulated

On account of the dilatoriness which Mill betrays at places, some critics assert that his explanation of the interest rate is only in terms of abstinence (Senior’s term) and the supply price of savings. The demand for savings based on the productive services of capital is not part of his thinking. This is evident in his observation that capital has no productive power, but only sets productive labour into motion. But Mill seems to believe that the growth of capital depresses its productivity. Capital is the fruit of abstinence, whereas the return for abstinence is profit. For some reason or the other, people defer their present consumption to a date in the future. The reason for time-preference are not very explicitly indicated either by Senior or by Mill, but the essential idea is there (Blaug). To cite Mill’s remark, the rate of interest measures ‘the comparative value placed, in the given society upon the present and the future’.

Mill

admitted

that

savings

would

occur

even

though capital

received no remuneration: ‘The savings by which an addition is made to the national capital usually emanate from the desire of persons to improve what is termed their conditions of life, or to make a provision for children or others’. But such savings had ‘not much tendency to increase the amount of capital permanently in existence. They were merely like long-range spending’. In equilibrium, the market rate of interest must equal the rate of return on capital. The rate of interest is, therefore, ultimately determined by

real forces. The quantity of money as such has no influence on the rate of interest, but a change in the quantity of money necessarily alters the interest rate. Mill considered the Smithian notion that ‘the rate of interest, though liable to temporary fluctions, can never vary for any long period of time unless profits vary’ ‘erroneous’, if not absurd. This repudiation continued, ‘.... although the rate of profit is one of the elements which combine to determine the rate of interest, the latter is also acted upon by causes peculiar to itself, and may cither rise or fall both temporarily and permanently, while the general rate of profits remains unchanged’.

Mill split up business gains or profits into interest, payment for risk, and remuneration for the labcur employed in operating the business. -He distinguishes the market rate of interest from the yield of capital. He admits that interest and profit are returns which are associated with the performance of different functions. Critics like Catherwood

consistent

definition

insinuate

that

Mill

has

no

clear

and

of profit and that he confuses the meaning of

£yolution of the Classical Theories of Interest and Profits

249

the term in a number of ways. Under barter, he supposes the rate of profit to be determined by the cost of labour, which means that he subscribes to the Ricardian residual profit theory. Under exchange, the same concept of profits is employed and profit is made the residual after wages and rent are paid. The profits are made to vary by an increase in real wages and an increased cost of production following an increase of population. Mill writes, ‘Interest,

and

the

wages

of superintendence,

can

scarcely be said to depend upon one another. They are to one another in the same relation as wages and profits are’. Further, “The only expression of the law of profits, which seems to be correct, is that they depend upon the cost of production of wages. This must be received as the ultimate principle’.

Mill defines profits to

include

the wages

of superintendence

or management. He points out that wages of management are determined in a different way from other wages. and notes also that profits, so called, include a third element—a payment for risk as well as wages of management (and interest). Hanev comments, ‘In his discussion of profits Mill shows some traces of an influence by Senior; but, on the whole, his thought is based on Ricardo.’ Asa matter of fact, Mill restated Ricardo’s profit theery in his Essays. His restatement appears to’ be wholly Ricardian in form, if not in content. Mill concurred with Ricardo, ‘As capital increased, population either would also increase, cr it would not. If it did not, wages would rise, and a greater capital would be distributed in wages among the same number cf labourers,’ Consequently, the rate of profit would fall, ‘If population did increase with the increase of capital and in proportion to it, the fall of profits would still be inevitable’.

The prime subject of Mill’s enunciation was the ratio of profit to the capital advanced, i.e., the rate cf profit. With fixed capital in the picture, the ratio of profit to the capital advaced was smaller, ceteris paribus, the larger the proportion of fixed to circulating capital, cr the Icnger the time over which the expenses of production, or the labour, had to be advanced. But Mill detected, whereas Ricardo

did

labour.-

The cost of labour might

were

at their

not,

the difference

lowest.

Labour

between

wages

and

be at its highest

might

be cheap

the

cost of

when

wages

but inefficient, so

that the cost of using it was high. Conversely, though wages might be high, labour might be cheap to use if it was efficient, especially if the cost of the commodities it consumed was cheap. In this case high wages and high profits could ccexist. Mill referred to the tendency of profits to be equalized under the influence of competition but he recognized that, where an element cf moncpoly was present, a relatively high rate of profit wright persist for considerable time. Inthe case of a business that could be carried on advantageously only ona large scale and in

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which entry was restricted, profit might remain above the general level. The same was true of an industry based ona successful patent cr other exclusive privileges. In all these cases profit was like rent. Mill linked the periodicity of crises to the very tendency of the rate of profit to fall, with the waste of capital in the slump preparing: the way for a recovery of profit expectations.

Mill explained dynamic profits very much as dynamic wages. The progressive state was characterized by increase of population, improvementin production, and an increase in capital. When alk these forces had been operative and arrived at a state of temporary equilibrium, profits would have been reduced to a lower rate because, according to Mill’s logic, the cost of living had been increasing. The reason for this was conceived as the result of the greater difficulty of production on the poorer soils. The minimum rate of profits was made to hinge on security, and the comparison of the present and the future, which was measured by the saver’s. willingness to abstain, and come about by the competition of an increased amount of capital. Mill introduced in his Principles the notion of a minimum profit if the capitalists were to continue to accumulate capital and to if it in industry. He. adopted Senicr’s notion of interest as a reward for abstinence and the notion of profit as being (or including) the ‘wages of superintendence’, as pointed out above. Profits tended always to the minimum level at which they just remunerated abstinence and labour of superintendence and no more (apart from risk-bearing)

and

could

not

fall below

this

without

adversely

affecting the supply. Mill was haunted by a fear that profits tended to fall as civilization advanced. In fact, profits would be at their minimun now, were it not for a series of new outlets for capital: ‘When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital... the rate of profit is habitually . ,. within a hand’s breadth of the minimum, and the country therefore on the verge of the stationary state... The expansion of capital would soon reach its ultimate boundary, if the boundary itself did not continually open and leave more space’.

Like Smith, Mill was optimistic in showing why a falling profit would be acceptable, though for different reasons.

rate of Social progress would tend to diminish the minimum accertable rate of profit. More security, less destruction by war, reduced private and public violence, improvements in education and justice—all these would lower the risks of investment and thereby reduce the minimum necessary rate of profit. In addition, mankind would tend to show more forethought and self-control in sacrificing present indulgence for future goals. This too would promote accumulation at lower rates of profit. Reduced risks and increased providence would

Evolution of the Classical Theories of Interest and Profits

258

lower profits and interest in Mill’s happy world of the future (Oser). Mill looked to innovations as one factor that could maintain the rate of profit. Despite the best of unsatisfactory. In the subject could be much consistency than Mill’s

efforts, Mill’s treatment of profits remains. words of Catherwood, ‘No explanation of a less satisfactory or be much more lacking in explanation of profits’.

References 1. M. Blaug, Economic Theory In Retrospect, Ltd., New Delhi, 1978 (3rd ed). i) .

M. Bowley.

Vikas

Publishing

House

Pvt.

Nassau Senior And Classical Economics, Gzorge Allen & Unwin

Ltd., London, 1967 (2nd impression). 3. E. Cannan, A Review of Economic Theory, A.M. Kelley, New York, 1964 (2nd ed.).

4.

B.F. Catherwood, London,

5.

Basic Theories of Distribution,

P.S.

King & Son Ltd.,

1939.

M. De Vroey, ‘‘Transition from Classical to Neo-class‘cal Economics: A Scientific Revolution” in The Methodology of Economic Thought, ed. by

W.J. Samuels, Transaction Books, New Brunswick, 1980. 6. ieee Theories of Value And Distribution Since Adam Smith, CUP,.

7. R. V. Eagly, The Structure of Classical Economic Theory, O.U.P., 1974. 8. R.B. Ekelund & R.F. Hebert. A History of Economic Theory And Method, Mcgraw—Hill Book Company, New York, 1975. 9. J. Finkelstein & A.L Thimm, Economists And Society, Harper & Row,. Publishers, New York, 1973. 10. W. Fellner, Emergence And Content of Modern Economic Analysis, McGram-H 11 Book Company, Inc., Tokyo, 1°60. 11. L.H. Haney, History of Economic Thought, The Macmillan Company,, New York, 1949. 12. P. James, Population Malthus: His Life aid Times, Roubledge & Kegan Paul, London, 1979. 13. B.S. Keirstead, ‘‘Profit’’, International Encyolopedia of the Social Sciences,. Macmi lan and Free Press. 14. F.H. Knight, Risk, Uncertainty And Profit, Houghton Mifflin Company, Boston and New York, 1921. 15. T.R. Malthus, Principles of Political Economy Considered with a View to their Practical Application, London. 1820.

16. J.S. Mill, Essay on Some Unsettled Questions of Political Economy, John W. Parker, West Strand, London

1844.

17. J.S. Mil!, Principles of Political Economy with Some of their Applications to Social Philosophy, 1848, wiih introduction by J. Ashley, London, 1909. 18. F.A. Neff, Economic Doctrines, McGraw-Hill Book Company, Inc., New York, 1950. 19. J. Oser, The Evolution of Economic Thought, Harcourt, Brace & World, Inc., New York, 1963. 20. D. Patinkin, Money, Interest, And Prices, Harper & Row, Publishers, New York, 1965ed. ~

Studies in Economic Analysis and Policy in Retrospect

252 D. Ricardo,

aN . . .

.

The

Principles

of Political

Economy

And Taxation,

1817,

Everyman’s Library ed., London, 1917 reprint. I. H. Rima, Development of Economic Analysis, Richard D. Irwin. Inc., Homewood, 1972 ed. L. Robbins, Robert Torrens and the Evolution of Classical Economics, Macmillan & Co. Ltd. London. 1958. J. Robinson ard J. Eatwell, An Introduction to Modern Economics, Tata McGraw—Hill Publishing Company Ltd., New Delhi, 1974. E. Roll, A History of Economic Thought, Faber, and Faber Ltd., Lendon,

1O537eds .

P.A.

Samuelson,

Economics:

An

Introductory

Analysis,

McGraw—Hill

Bock Company, Inc., New York, 1961 . J.B. Say, A Treatise on Political Economy; or the Production, Distribution cnd Consumption of Wealth, trans. by C.R. Prinsep and ed. by C.C. Biddle, Claxton, Remsen & Haffelfinger, Philadelphia, 1880.

. J.A. Schumpeter,

History

of Economic

Analysis, George Allen & Unwin

Ltd, London, 1954. . W.A. Scott, The Development of Economics, Appleton—Century—Crofts, Inc., New York, 1933. . N.W. Senior, An- Outline of the Science of Political Economy, Reprint, London, 19238.

. A. Smith, An Inquiry into the Nature

and Causes of the Wealth of Nations,

1776, ed.. by E. Cannan, and introd. by M. Lerner, Modern Library, New York. . R. Triffin, Monopolistic Competition and General Equilibrium Theory,

Harvard University Press, Cambridge, 1949. . G.S.L. Tucker, Progress And Profits In British Economic Thoug't (16501850), Cambridge University Press, 1960. . E, Whittaker, 4 History of Economic Ideas, Longmans, London, 1940.

CHAPTER

FOURTEEN

Rehabilitation of the Classical ‘Theory: A Recapitulation The classical theory was concerned with the question of accumulation of the means of production and of property. Capital accumulation was possible because commodities could be used to make commodities. Capital was treated as an embodiment of earlier labour inputs. Capital was co-ordinate with wage-fund. Commodities were produced by commodities in a circular process. Intermediate goods lay at the centre of the stage. Capital and labour shared the resulting net product. The economic system was_represented as a circular flow of production and consumption based on the concept of the net product or surplus. Relative bargaining strengths or differing market structures affected income distribution. Income distribution was a matter of social conflict rather than a technical matter. It could not disregard or devalue the significance of the social and pclitical elements, that is, power relations workers and capitalists, pressure tactics or confabulations,

between to that

question.

The classical production theory allowed for changes in the factor proportions in agriculture (which was subject to the operation of diminishing returns) and employed the concept of marginal product of the variable factor. To the classics, pricing was an aspect of distribution. To them, the distribution problem was analytically

distinct from the pricing problem. In their economics: demand played no direct analytical role in price determination. Their price theory was founded on the quantities of the various means of production required to call forth a given quantity of product. Ricardo attributed two meanings to the invariable standard or measure of value. One, that of having invariable value with respect to its own means of production when distribution of income between wages and profits altered with no change in technology. Two, that of invariable value with respect to technical change over time—the measurement in terms of labour content retained some meaning but with it the risk of metaphysical or subjectivist views increased (work being ‘toil and trouble’ or ‘sacrifice’). In the classical theory the equlibrium condition on which the formation of product prices (the natural or normal-prices) rested consisted simply in the equality of the rate profits in each sector. This hypothesis, together with the

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Studies in Economic Analysis and Policy in Retrospect

consideration of the physical or real costs of production (that is, the quantity of various means of production to obtain a given quantity of output) was sufficient to determine the relationship between distributive variables, rates of wages and profits, and

prices

of production. This was an approach based on objective data. The nature of profit, according to Mrs Robinson,

is the

central

problem of economic philosophy. In the classical scheme the rate of profits emerged from the technical data of the scheme because the necessary wage was part of the specification. Profit was regarded as a residual. The rate of profits was expressed as a ratio of purely physical quantities. The real wage rate was given in terms of commodities. Marginal physical product of labour was equal to wages and interest on working capital.

II In the marginalist theory, distributive prices, like commodity prices, were fixed by the forces of demand and supply. Value and distribution theories were inteiJaced, interdependent. But production and distribution were treated as two separable branches. The former was examined with reference to a linear homogeneous production function; the latter with reference to the marginal productivity theory. Relative prices of factors of production became a function of the ratio in which they were employed. The productive system was viewed as a One-way flow from factors of production to final outputs with intermediate goods lost from the sight. Tbe distribution theory was deduced from a model in which land and labour were the only factors and no capital equipment was used. The Austrian school identified capital with time. Capital was thought of as a unidimensional magnitude, independent of distribution. Capital was co-terminus with a stock of physical means of production. This notion of capital was indispensable to the determination of the rate of profits as the price of a specific factor of production, homogeneous in nature and identifiable with capital. Fisher consistently clung to the proposition that capital was the only factor of production. Clark made the distinction between capital as a permanent fund and capital asa set of perishable assets. The capital stock could always be augmented by lengthening the period of production. Lastly, wage was governed by the marginal physical product of labour.

Bohm-Bawerk and Fisher expounded a real capital theory.. The former equated time with cost. Productivity of investment in capital assets influenced both the rate of interest and the rate of capital accumulation. Knowledge was regarded as both an input and an output in the production process, Capital accumulation was always associated with the utilisation of existing knowledge and the creation of new knowledge. The marginalist approached was founded on consumer preferences. The magnitude of capital as a factor of

Rehabilitation of the Classical Theory

Zo

production was beyond the purview of the distribution of income. Capital-labour intensities were identical in all industries in all circumstances. The fectors of production were distinct from the final products. The taste factor (implying abstinence, time-preference or time impatience) was given. Distribution was treated as an aspect of pricing. The problem of distribution of product between wages and profits was resolved as a counterpart of the theory of long-run equilibrium prices, based on data, such as technology, tastes, and availability of resources. Society was conceived cf as a harmonious ‘whole without internal conflicts of interests. Allocation in the economy was done under the aegis or guidance of the hidden hand, and the market functioned in such a manner that competition brought about at all times equality of factor prices to -factor marginal productivities. Such a theory was all right in the case of variable factor co-efficients. In the case of fixed factor coefficients only the macroeconomic distribution theory could apply. The marginalist theory assumed capital to be completely malleable like jelly. In other words, it assumed that capital was a homogeneous factor of production. This was tantamount to saying that one set of capital assets could be transformed into another set of capital assets without any sacrifice of consumption or without incurring further cost. This assumption was essential for calculating the marginal product of capital. But it was not true; it was erroneous. Secondly, the marginalists (like Clark and Wicksteed) assumed that production function was homogeneous and of first degree. The first attribute meant that the sums of the e,ponents of the variables in all terms were equal. The second attribute meant that the sum of the exponents in every term was unity. Thirdly, aggregate production function took as given (a) the stocks of labour and capital, and (b) the knowledge of how one factor may be substituted for the cther, i.e., the state of technica) knowledge was assumed to be given. By implication, it was assumed that there was smooth substitutability between capital and other factors of production. Thirdly, as a corollary of part of the second assumption, it was supposed that technical progress was absent, except of the Harrod-neutral type, which ‘fell like manna from Heaven’. Fourthly, the marginalists posited that the stock of natural agents of production as well as the knowledge of production possibilities was given. By the same token, it was posited that capital was a variable factor for the micro production units. Fifthly, it was assumed that capital accumulation obeyed the law of diminishing returns. The Austrian ‘economists emphasised the increasing cost of capital as a cause of diminishing returns. The increasing cost extended to both construction for replacement and maintenance. The construction of an additional capital asset entailed the use of existing capital assets and resources. The cost was interpreted in terms of opportunity, displacement, or alternative cost, which was the consumption that was foregone for the purpose, ‘that is, sacrificed when other capital assets and resources were diverted to its construction. Sixthly, and

lastly, constant returns accrued to scale.

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Studies in Economic Analysis and Policy in Retrospect

Generally, the marginalist theory has been accused of a good many weaknesses, such as these (a) that its treatment of distribution is apologetic, (b) that it relegates technology to a subordinate role, (c) that it introduces an ‘obstructive postulate’, and (d) that it neglects growth. Coming to details, we have, for one thing, that the foundations of the theory are logically insecure. On a second count,

aggregate capital cannot be defined in terms of its own technical unit. It can only be defined in value terms. Why? Because, firstly, the rate of profits or interest, which is a pure number, has to have

a

value in order to define the value of profits, and, secondly, because capital goods are specific, heterogeneous, and someone’s private property. On a third score, measuring capital is a contentious subject. The marginalists measure real capital uniquely in value (money) terms. They relate it with the period of production. But the definition they give it leaves much to be desired. It still remains a puzzling, undecided question.’ They fail to recognise that in the construction of a capital asset the crucial or strategic fact is not time but rather cost. In the fourth instance, no clear and precise distinction is drawn between capital productivity and the taste factor affecting capital accumulation. Fifthly, as a matter of fact, the problem of capital accumulation is not required to be discussed; it is tacitly assumed away. Sixthly, the marginalist theory contains no indication of how a technical unit for capital may be devised. Seventhly, it is applied to a stationary or static state and to the problem of continuous growth simultaneously. Eighthly, it evades the issue of the influences governing the supplies of factors and of ‘the causes and consequences of changes in technical knowledge on growth, accumulation

the

possibility

and income shares. Ninthly,

of capital-reversing,

positive relationship between profits. ‘To elaborate it further, may not be competitive both profit and not dominated by a

that

is, the

it is oblivious

possibility

of

of a

the value of capitaland the rate of the same technique of production at a relatively high and a low rate of different technique for the interim

values of the rate of profit. But the same technique may be competitive both at a relatively high and a low rate of profit and dominated

by a different technique for the interim values of the rate of profit. To put it differently, the same technique becomes most profitable at two or more rates of profit. This valuation of capital is more than a mere index-number problem and deeper issues lie involved with it. Tenthly, it is ignorant of double-switching, which is the possibility that the same technique may be the most profitable of all possible techniques at two or more separated values of the rate of profits, even though other techniques have been the most profitable at rates of profits in between. That is to say, it is a possibility when there is a . change from one technique to another, and in the modality we go to a lower value of capital, a lower output per head of the technique. These two omissions strike at the very foundations of all versions of the theory, whether they be in an aggregate production form or in terms of a supply and demand approach at either a micro ora macro level. Eleventhly, the theory regards the rate of profits as

Rehabilitation of the Classical Theory

257

negatively correlated to the value of capital per man, whereas that may be positively correlated. Twelfthly, this theory is incapable of explaining adequately distributive shares and prices. Thirteenthly, capital cannot be measured without a fore-knowledge of the rate of interest. Insofar as the marginal production function includes. capital, it cannot determine the equilibrium rate of interest, for that will be a vicious circle or begging the question. Fourteenthly, the marginalist procedure is glaringly ill-equipped to cope wiih the problem of time. Fifteenthly, the physical marginal product is an extremely complicated entity, whilst the value of the marginal product has no unambiguous meaning since the pattern of prices, of factors, and of commodities is altered by the change in the productive capacity. Thus it is hard to understand what is meant by saying that a factor receives a reward equal to the value of its marginal product. Finally, there is the failure of the marginalists to produce a theory of profits as an alternative to the classical theory that was both coherent and plausible.

The foregoing critique of the marginalist theory destroys the concept of the aggregate production function, as also the underpinnings of the traditional demand curves for capital goods and labour at the levels or planes of both the economy and the industry. It thereby discredits the marginal productivity theory of distribution, especially the traditional demand and supply approach to the distributive problem.

Ill Let us now turn to the battle of wits which raged between the stalwarts of the English Cambridge and the veterans of the American Cambridge. They have been recently given new epithets— the neo-Keynesians and the neo-neo-classicals respectively. They

have differed between them on whether distribution theory regarded as just an aspect of the marginal theory of value.

may be

The neo-Keynesians desire the theory of value to be confined to its rightful place a Ja Ricardo: ‘the study of the relations between the wage rate, the rate of profits, and the system of relative prices’. . As Garegnani puts it, ‘These relations would then provide the basis for studying the circumstances on which depends the distribution of the product between classes’. They prevail upon us to ponder anew Ricardo’s distinction

between

‘commodities,

the

value

of which is

determined by scarcity alone and the value of those commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition «perates without restraint’.

In another vein, they maintain that the

share

of

profits in the national income is the outcome of the Keynesian S-I relationship and the differing values of the saving propensities of wage-earners and profit-receivers. The equilibrium rate of profits in a capitalist economy is associated with the underlying rate of

258

growth class.

Studies in Economic Analysis and Policy in Retrospect

of the economy

and the saving propensity of the capitalist

The neo-Keynesians consider that the properties of the distribution theory do not necessarily coincide with those that are pertinent to the value theory. They are critical of the marginalist nexus between the marginal products of factors and their equilibrium prices. Like Ricardo and Marx they argue that the distribution theory should be analysed in different terms from those of the marginalist value theory. They want the distribution theory to precede in context and priority, though not in time, value theary. Accordingly, once either the wage-rate or the rate of profits is known, so also are prices. The neo-Keynesians are conscious of conflicts between the classes and regard class distribution of net product as dependent on the institutional set-up of society. They do not regard capital as a factor of production on the same footing as labour or land. They use the terms ‘wage rate-rate of profits trade off’ or ‘wage-interest frontier’ in lieu of the ‘factor-price frontier’ term employed by the neo-neo-classics. They assail the marginalist methodology. They deem the marginal productivity theory of distribution as ‘bankrupt’ in a world of heterogeneous capital goods. They are convinced that the distribution ef income and factor prices cannot be explained either within the system of production alone or as the outcome of a .

general gquilibrium system even when we use marginal notions

and

modern

programming

methods

Factors

productivity and

forces

existing elsewhere in the economic system must be introduced.

On the other hand, the neo-neo-classics consider the marginal principle to be of overwhelming importance fer the value and distribution theory. They stress the part of the possibilities of technical substitution, both of factors and of commodities, one for another. To them, the principle of scarcity and the relative factor supplies for factor prices and factor shares are relevant. To them, the institu-

tional fabric or edifice of society is irrelevant. They highlight the technical factors. They suggest that harmony characterises the various social grcups. They maintain that S is/determines I. They presume full employment. They overlook risk and

largely ignore

money, for it is, after

uncertainty. They

all, a mere veil. They state

categorically that in a perfectly competitive economy and in longrun equilibrium, the Ricardian and Malthusian theory of rent was

extended to factors of production other than land. They assert that labour and land can be measured in terms of their own technical units. Therefore, their marginal products can be defined independently of the equilibrium prices. This allows their marginal products

to be used in the explanation of their prices. But aggregate capital (from the economy-wide point of view) cannot be similarly defined in terms of its own technical unit. It can only be defined in value terms.

Why?

pure number,

Because the

rate

of profits

or interest,

which

is a

has to have a value in order to define the value of

profits, and because capital goods

are

specific,

heterogeneous,

and

Rehabilitation of the Classical Theory

259

someone’s private property. They equate or at least relate in a relatively simple way equilibrium factor prices and marginal products. They invoke the concept of malleable capital. They believe that the wage rate and the rate of profits are factor prices on an equal footing. They explain the level of output and its distribution between labour and capital simultaneously by the same set of factors, According to them, both the amount of the profits which the owners of property receive on their invested capital and the rate of profits itself are related to the technical characteristics of the capitalist system of production. By making the pricing of the factors of production but one aspect of the general pricing process of commodities, itself regarded as a reflection of the principles of rational choice under conditions of scarcity and so thought to be above sociological and institutional! facts or reverberations, they hope to escape from uncomfortable questions thrown up by the RicardianMarxian scheme, for example, whether relative bargaining strengths or varying market forms (or morphology) can influence the distribution of income. They contend that the rejection of the marginalist concept of an aggregate production function is not the same thing as the rejection of the marginal productivity theory of distribution. The protagonists of neo-Keynesianism concede some point in this contention. The neo-neo-classics feel assured that in the heated debate the concept of an aggregate production function of the marginalists was a casualty no doubt, but their marginal productivity theory of distribution emerged unscathed, unworstéd. They do not wish to delimit the scope cf the marginal value theory. They admit the destruction of the wider application of certain simple parables. They wish ‘to hasten away from the stationary states and equilibrium comparisons into the richer worlds of processes and dynamic adjustments in growth models’. They justify the marginalist procedures. They argue that the marginalist revolution was concerned with, firstly, the prior, and, next, the equal importance of that blade of ‘the pair of scissors’ known as demand.

IV Now we are ina position to move to the Sraffa Revolution of 1960. Appeared inthat year his book called Production of Com-

modities

By Means

Of Commodities:

Prelude

To A

Critique

Of

Economic Theory. It hasa dual purpose, viz., One, to provide a basis for criticising the marginalist theory, and Two, to perfect the classical economic approach analytically without doing any damage or violence to the classical frame of reference. As Mrs Robinson writes, Sraffa’s system was designed to emphasise the effects of difference in the rate of profits in a single economy. Meek regards Sraffa’s attempt as ‘a sort of magnificent rehabilitation of the classical (and up to a point Marxian) approach to certain crucial problems relating to value and distribution’.

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~ Studies in Economic Analysis and Policy in Retrospect

Sraffa chooses the relationship between production prices and distributive variables (rate of profits and wage rate) as the objects. of his analysis. All other variables (such as technical levels of output, structure of industry, etc.) are taken as data or parameters. He drops the abstract concepts of supply and demand curves in toto. Then, he abandons the marginalist concepts of partial and general equilibrium. He also discards the marginalist endeavour to determine equlibrium prices and quantities simultaneously. In his analysis the condition of equilibrium for prices of production simply consists in the equality of the rate of profits in the different sectors. It no longer calls for the stricter, more rigid condition of equality between demand and supply in all sectors. Sraffa further rejects the attempt to solve the problem of long-run distribution between wages and prices as part of the price theory on the basis of such data as technology, availability of resources, and consumers’ tastes.

Sraffa criticizes the marginalist concept of capital as a magnitude measurable independently of distribution and prices. In his opinion, the ‘value of a stock of capital’, in general, has no meaning apart from the distribution of the net product between wages and profits, so that there is no sense in the idea that the rate of profits is determined by the marginal product of capital. He is sceptical of the average period of production concept developed by BohmBawerk for measuring the capital intensity of production techniques over the head of the distribution issue. He finds the seminal terminology of the marginalist theory suspect, and rejects it. Gone with this rejection are the terms like marginal product, marginal cost, and marginal utility. Last but not the least, the subjectivist viewpoint of the marginalist theory with its reliance on equilibrium and perfect competition is also given the go-bye. Sraffa contends that ina surplus-less or no-surplus econcmy which produces as outputs barely the quantities and types of commodities that are required as inputs for their production, relative prices are governed by the condition of production alone. On the contrary, in a surplus-generating economy which produces a surplus or excess of outputs over inputs, relative prices are governed at once by conditions of production and by the manner in which the surplus or excess is apportioned between wages and profits. Sraffa points out that at any given moment prices are determined in accordance with the prevailing technology. Technology alters when markets are widened and when division of labour (specialisation or differentiation) increases. Sraffa takes pains to show that one technique of production may yield maximum profitability at two different rates of profits, even if at the intermediate rates another technique may be more profitable (what we have seen above as the ‘reswitching of techniques phenomenon’). This being so, we cannot forge or fabricate a measure of capital which satisfies the condition that when the rate of profits rises, the techniques chosen present a decreasing capital intensity.

- Rehabilitation of the Classical Theory

261

Let us now enumerate, one by one, the broad and salient features of the Sraffa exercise. In the first instance, in his system distribution is not endogenously generated through production relations. In conjunction with prices, production relations determine only the net product or surplus that is to be apportioned. In his system production goes on from day to day and from year to year in exactly the same way without any changes occurring in the scale or factor proportions at all. To quote Meek, ‘‘Sraffa is able deliberately to concern himself with the investigation of the samé properties of an economic system which the classical economists objectively concerned themselves with, while at the same time avoiding the necessity of making any (possibly objectionable) assumptions about the nature of returns.’’ In the second instance, if an economy turas out a surplus of outputs over inputs, then the distribution of the surplus must be determined through the same mechanism and at the same time2 as are the prices of production. In the third instance, Sraffa takes into account levels or scales of output as data of the problem, and distinguishes prices of production from market prices. With this tour de force or deus ex machina he isolates the problem of prices of production without jeopardising the analysis of levels of output and levels of realisation (which is the Marxian distinction).

In the fourth instance, the hall-mark of Sraffa’s pains-

taking and intelligent treatise is the classification or categorisation of commodities as basics and non-basics. Basics are necessary commodities—that are directly or indirectly necessary for production of output in all industries, that is, essential to all production processes of the system. By comparison, non-basics are luxury commodities, that are used as means of production only for themselves or other non-basics, or they are not used at all. Besides, non-basics are not used as means of production in any other way. To illustrate, labour and land are non-basics, i.e., non-produced

means of production. This distinction is germane to the inquiry into the effects of technical changes. Thus, any change in the technique of production of any basic has a general repercussion on the set or network of all relative prices as well as on the wagesprofits relationship. By contrast, any change in the technique of production of a non-basic has a dent or impact on just the exchange ratios between the non-basics involved and all other commodities, not those between basics, nor does it modify or upset the wages-profits relationship. Alternatively, the repercussions are restricted to the exchange ratios concerning non-basics, and do not extend to the exchange ratios between basics or to the relationship between

wage

and

profit

rates.

As

a

result,

relative

prices are

affected, given the distribution pattern, by the production structure of the basics, which are produced means of production. In the fifth instance,

the induction

of the novel

but cardinal concept of a

standard comm )dity (on the lines of corn in classical economics or fish in Marshallian economics into his model or paradigm or caveat is its back-bone or corner-stone, so to speak. A standard commodity is a composite commodity (Marshall had this notion employed for

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illuminating, though tangentially, the inter-relatedness of commcedities and their prices by referring to different types of meat, tea, etc.) in which the product and the whole gamut of the means. of production are composed of the same commodities, in the same proportions. With its aid Sraffa resolves the first meaning of Ricardo’s invariable standard of value. That is, he is enabled by it to resolve, after suitable redefinition, the Ricardian problem of the invariable standard of value. In the sixth instance, Sraffa demonstrates that one and only one set or complex of prices can be found which fulfils all relations at the same time. Lastly, the upshot of Sraffa’s exercise is the Ricardian proposition, namely, the higher the wage rate, the lower the rate of profits. The old lesson thus comes out in the wash. The kettle of fish is thus unaltered.

V We now propose to paraphrase below Professor Joan Robinson’s* expose of Piero Sraffa’s** epoch-making work. Her presentation appears to us to be the cap-stone of, the very cream (or butter) skimmed off his celebrated contribution after a great deal of mental churning.

The production of each commodity in a period of time (say, 7 months) requires a particular amount of labour time (all workers being alike) and particular inputs of other commodities. At the beginning of each period, there are stocks in existence of the inputs. required for a particular rate of output. The stocks are entirely used up in the process of production (there are no ‘machines’). When the system is viable and can continue to produce, the stocks are recreated in the process of production. The excess of the product over the replacement of the necessary inputs is the net output of the period. Thus, suppose we have the following technical conditions:

12 men with | ton of steel produce 4 tons of iron. 32 men with 4 tons of iron produce 4 tons of steel.

JO men with 3 tons of steel produce 100 tons of bread. This means that 44 men, with an initial stock of 4 tons of iron and 1 ton of steel can replace the stocks and produce a net output of 3 tons of steel in 7 months.

_ Steel is required to produce itself, for steel is needed to produce: iron, and iron is needed to produce steel, but bread is a pure consumption good and as such it does not enter into its own production. *The guide.

author

has

taken

this liberty as she was his teacher and research

**Mr Sraffa was the author’s guide in most problems connection with his research studies at Cambridge (1956-60).

cropping

up in

Rehabilitation of the Classical Theory

263

either directly or indirectly through iron course, it is essential for the support of life.

or

steel,

though,

of

When the economy is in a stationary state, reproducing itself from period to period, there is no net investment, and all net profits as well as all wages are consumed. In that event, 54 men with 4 tons of iron and 4 tons of steel produce a net output of 100 tons of bread, every 7 months. At the same time, they are reproducing the ircn and steel used up in production so that the entire process can repeat itself from period to period. The stocks of iron and steel are owned by capitalists, who employ the workers for wages, and take part of the bread as their net profit (The wage is paid out of the product. There is no wage ‘fund, which the capitalists advance to their workers. These constitute a simplifying assumption, not indispensable to our argument). The physical data are not ina position to tell us how the net output is shared between wages and profits. So we may postulate »that the rate of profits is uniform, so that there is the same percentage return on the value of the stock of means of production (quantities of iron and of steel) required for each. product. But then all we know is that the prices of the commodities must be such that each yields the same rate of profits.

When the rate of prefits

is given,

we can

then

work out the

pattern of prices that it brings forth. Prices are such that the output of each commodity yields profits at the given rate on the value, at the corresponding prices, of the stock of inputs required to produce it. When we know the pattern of prices, we can value the net output and the initial stock in terms of a unit of commodity, or in terms of labour time.

The simplest way of setting out prices is in terms of the cost of labour time. Then we can operate with a money-wage rate per unit of labour time so that the cost of labourin terms of each commodity turns on the money price of that commodity. Assume that the wage is Rs 10 per man for 7 months’ employment. There will be corresponding rupee frices of iron, steel and bread, appropriate to the given rate of profits. Assume further that the rate of profits is 50 per cent per period. Then, the price of iron is such that:

12 men Rs 10+(1 ton steelx price of steel) ( 1+ a —— =4 tons of iron x price ofiron per ton. The price of 4 tons of iron is equal tothe wage paid for its production, pius the value of the steel input, plusa 50 per cent profit make-up or margin on the value of the steel. Likewise, the price of ——

=4 tons of steel x price of steel per ton,

ot:

aes

Studies in Economic Analysis and Policy in Retrospect

Similarly, the price of bread is such that:

10 men XRs 10-+-(3 tons of steel x price of steel) ( 1+

50

“100.

= 100 tons of bread x price of bread per ton. What

are the results for our

illustration?

Table A Profit rate ’ (per cent per period)

One ton of steel (Rs)

One ton of iron "i GR)

One ton of bread (Rs)

75

5653

2373

30.68

50

285.7

aa

13.86

a5

192.8

90.3

8.23

0

146.7

66.7

5.40

Table A shows sets of prices appropriate to different rates of profits, supposing a money wage of Rs 10 per man. When the rate of profits is zero, all the bread goes to the 54 workers employed. Insofar asthe workers have Rs 10 each, all of which is disbursed, and 100 tons of bread are available, the price of bread

per ton must be Rs 5.40. Table

Profit rate (per cent per

period)

a

Value of produced inputs

(Rs)

B

Value of :

Share

of

net output

wages in net

(Rs)

output (Total wage bill Rs 540)

3370.4

3068

0.18

1619.2

1386

0.39

25

1132.4

823

0.66

0

853.6

540

1.00

We can now caiculate the value of the inputs to the production

process

(4tons of iron and 4tons

of steel) and

the value of net

output (100 tons of bread) at different rates of profits. Table B shows our calculations, for which we have assumed that the share of wages in the value of net output, i.e., the money wage-rate is

Rehabilitation of the Classical Theory

265

Rs 10 per man forthe period of production. The value of the capital that has been invested (the value of produced i puts) and the value of output are both functions’ of the profit rate, and have no meaning independent of it. The illustration given by us also Jays bare the distinction between the wages as the real cost of Jabour to the capitalist and the real wage from the standpoint of the worker who wishes to buy bread. When the rate of profitsis 50 per cent, the steel-sector capitalist must pay a worker the equivalent of 0.035 of a ton of steel Rs (10/285.7) per period, with which the worker may buy about three-quarters of a ton of bread Rs (10/13.86). ‘Just as for a particular flow of inputs and outputs there isa pattern of prices and of shares of profits and wages in net output corresponding to a given rate of profit, so there is a rate of profit corresponding to given shares of profits and wages. Besides the technical data, it is necessary to know one of three relationships— the rate of profit, the share of profit in net output or the real wage in terms of one commodity or bundle of commodities. The value given to any of these entails the value of the other two and settles the pattern of prices.’ ‘In the special

case in which

the

ratio

of profits to wages is

the same for each commodity, labour-value prices prevail. There is then a pattern of prices given by the technical input-output relations, which is independent of the rate of profit. In all other cases, the pattern of prices and the value of the stock of means of

production vary with the rate of profit, as in the above example.’ ‘In every case, a higher rate of profits means a higher share of profit in the value of net output and a lower share of wages in the sense of the cost of labour, for with given money wages, a higher rate of profit entails higher money prices. Generally (except in some special conditions), the rea]-wage rate is lower where the cost

of labour

is lower,

though

not

necessarily

in

the

same

proportion.’

VI To conclude, we owe it to Sraffa’s demonstration that only one set of prices can be found that satisfies all relations at the same time. Sraffa’s argument comes as a challenge or affront to the received ideas. His narrow and strict assumptions are competent to replace them approriately. His analysis provides ‘the indispensable famework for an understanding of the problem of distribution in a private-enterprise economy’. It rehabilitates scientifically the Ricardian-Marxian model. But it also stamps out a lacuna in that model which did not resolve the problem of determining relative prices and their relationship with the distribution of income between wages and profits. It is responsible for a U-turn in our

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Studies in Economic Analysis and Policy in Retrospect

economic thinking, forthe fact that it completely over-turns the marginalist approach which generations of economists all the world over agreed to swallow without a pinch of salt. And with it disappears the theoretical apologia for the capitalist system as the best system of all. Economic theory has returned to classicism in this way and opted for objectivity by disallowing for good the taint of subjectivism. Although in an actual industrial economy the concept ofa uniform rate of profits encounters numerous difficulties and although Sraffa’s model is even less applicable in a socialist economy, as indicated by Mrs Robinson, yet it is the bloom of the revolutionary doctrine which Sraffa formulated in the course of three decades. Let us now set our findings in perspective.

VII In the marginalist theory the market for the final products is nalogous ta that forthe factors of production. In the former, aalue-equivalents

are

exchanged;

in the

latter,

income

is paid to

vhose with property rights in the production process. The marginatist theory assumes perfect information on the part of the economic lagents, as ifitwere a free good (market intelligence is the current term, which is more descriptive). It also assumes that households and firms maximise utility and profit respectively. It assumes, by implication, that while households save, firms invest. The critics urge that no

bearer can

possibly be

both rational and possessed of

perfect or complete market and technical information. They assert that neither households nor firms are the simple, homogeneous units as the marginalists assume them to be. The marginalist theory regards profit as a payment for the services of capital, and capital is measured as an average period of production by reducing the differences between capital goods to time. The theory assumes that inputs and factors are interchangeable and that production is indefinitely flexible. It ignores preperty and assumes motivation, and takes a uniform molecular view of society. It further assumes that all events happen within the specified time-horizon. Needless to say that all these assumptions are rejected by thé neo-Keynesian theory. The neo-Keynesian theory detects a contradiction in the marginalist notion that investment is governed by considerations of marginal

the actual

productivity.

capital stock

The

argument

reflects the

the past, the production function

advanced

technological

reflects those

is that

whereas

possibilities

present

of

or expected

in the future, since knowledge accumulates, and because of this the two influences have different effects. The marginalists make the capital-intensity chosen a function entirely of the rate of interest. The rate of interest matters exactly because the equipment is durable and generates returns, which must be discounted to obtain present value. Yet precisely because the equipment is durable, the rate of interest cannot govern a marginal choice, as durable equipment chosen in the past still exists and will influence the choice.

Rehabilitation of the Classical Theory

267

The notion that the functional distribution of income is indeterminate, resting rather on the phenomenon of class struggle, has now become an article of faith among certain neo-Keynesians. Exactly for this reason, Sraffa’s work is regarded by them as a Jocus classicus of all anti-orthodox distribution theory. As a sequel to that, the bi-Cambridge controversy proved so very fecund that the adherents of marginalism soon found themselves caught up in the cross-fire of virulent criticism for their frivolous assumptions, and the rift which started as peripheral in nature lost no time to become exceedingly agerandised, and there were strong reasons to that: In Sraffa’s system intermediate products were given pride of place, whereas in the marginalist system they were deleted to the extent possible. The champions of Sraffa’s system treat the product market and the factor market as different markets in the sense that the payment of net income is not considered an exchange. In the capital market one set of capitalists (for instance, savers) gain at the expense of another set (for example, investors), and vice-versa, but the relative shares remain the same. Inthe labour market competition affects the relative shares between labour and capital. The neo-Keynesians see factors. of production as sorts of income-bearing items rather than as actual productive agents. Factors are collections of inputs held as income-bearing property. Inputs are goods deemed technologically as items in the production process. Neither labour nor capital can be measured independently of prices. The neo-Keynesians assume that payments to capital are dispositions of a surplus and do not involve any kind of exchange. Contrasted with the marginalists, they do not mention consumers/ households and firms/producers. Only industries and social classes. are operational entities. Each industry is defined by the technique it employs. What really counts is the interlocking of possibilities. and necessities, rather than of motives, plans and information.

In Sraffa’s system there are two kinds of analysis of prices, wages. and profits—movements of relative prices with real wages, and. movements of money prices with money wages. Take first the former. Given a wage rate, prices will be determined by the condition that the rate of profits must be the same in every industry. To see the effect of changes in relative shares on prices, suppose the wage rate rises. At the given initial prices, labour-intensive (or employment-intensive) industries will have to devote a greater than average share of their sales proceeds to paying their wage-bill, leaving a less than average return on capital, while capital-intensive industries will find themselves in just the opposite position, with a greater than average return. To equalise the rate of profits, therefore, when the real wage rises, the relative prices of labourintensive goods must rise, while those of capital-intensive goods must fall. Take next the latter. A general inflation of money prices, with money wages constant or rising more slowly, increases profits, and

268 so

Studies in Economic Analy is and Policy in Retrospect requires relative

faster,

decreases

price

profits.

adjustments; Business,

with

money

therefore,

wages

rising

fights a war on two

fronts—with its employees and with the general public. Profits are determined partly by the money-wage bargain struck between employers and employees, and partly by the terms ofthe sale of goods and services to the consuming public. The divide between the neo-classicals and the neo-Keynesians has sharpened and become pronounced on account of the fact that the former assume continuous substitution possibilities (with supply in perfectly elastic supply—for which Kaldor coins the phrase the “Widow Cruse’), whereas the latter assume fixed production co-efficieats. In Sraffa’s system long-run prices are governed wholly by the conditions of susply. D2mand is relevant only to the determination of quantities. Inthe neo-classical theory both prices and quantities are governed by demand and supply acting in conjunction. For the marginalists, markets typically yield benefits to all parties who take part inthe production process, in proportion to their respective contributions to production. For the neoKeynesians, the market-place is the arena for the exercise of economic power, the battle-field in which ‘the division of spoils’ between classes and sub-classes is settled.

For

the

former,

exchange

boils

down to an allocation problem. For the latter, exchange is related to the reproduction of the system and to the disposal of the surplus— which eventually dissolves into the simple question of which party wields the ability to gain at the cost of another party (or other parties). Power is anon-entity in the former; it is all-in-all in the latter (Hollis and Nell).

VII After performing a post-mortem, Blaug concludes his study by remarking that Sraffa vindicated Ricardo but one could not be too sure about the gain from this vindication. He asks: Are we any the wiser about the functioning of an actual economic system as a result of this? And he attempts an answer which is this that Sraffa’s analysis does not provide any theory of the determination of the rate of profits other than that in which non-basics play no part whatever. Sraffa’s thesis is that national output, whether expressed in physical or value terms, will be unaffected by how the net output is shared between labour and capital as wages and profits. His rigid stand on technical possibilities is refractory to the problems of comparative statics. To amplify, profit maximisation and equality of the rate of profits between different industries is incompatible with the existence of increasing returns to scale in some industries (for example natural monopolies). In such industries the pattern of demand is vital to the explanation of relative prices. Sraffa does not tell us why profits are equalised. Moreover, if the

production

functions

of individual

enterprises

are

not of strictly

Rehabilitation of the Classical Theory

269

fixed co-efficients type, thea the choice of different techniques would depend as much on relative prices as relative prices do on the techniques actually adopted. {nthat circumstance, the invariance

of the measuring

rod would turn out

to be false.

{in other words,

these two weaknesses besmirch Sraffa’s condition that the wagesprofits relationship in an economy can be whatever we would like it to be. This amounts to saying that economic forces do not limit the possibilities of an incomes policy. Inthe Ricardian system, corn is both an value and the only wage-good consumed by Sraffa’s system, the standard commodity is an value but the working class does not consume

invariable measure of the working class. In invariable measure of it.

Blaug insinuates that faced with the well-known problem of testing comparative static propositions, the neo-Keynesians instead take refuge in theorems about the conditions that are required to rule out switching. He denies that switching among techniques does, in fact, occur. It remains an open question. To get capital-reversing without switching calls for still more tortuous assumptions bout a technology: ‘If we cannot persuade ourselves that switching is acommon occurrence, we are not likley to believe that capitalreversing is bound to happen.’ But these insinuations do not have sully the image of the Sraffa system.

teeth enough

Considering everything, we are left with

the net,

to tarnish

over-all

or

con-

clusion that the data of the classical theory are: the level and composition of output, the conditions of reproduction of commodities, the real wage-rate (or the profit-rate). These are exogenous

variables. By contrast, the back-bone of the marginalist (neoclassical) theory lies in the following data: the utility functions of individuals, the existing technology, the initial factor endowments, the distribution of factor endowments. On the basis of the two alternative sets of data, relative prices emerge in the marginalist theory as the equilibrium of the contending forces of demand and supply and in the classical theory as the long-period position that will be established from the competitive tendency to a uniform rate of profits. But both theories do abstract from the influence of uncertain'y and expectations about the future and the frequent irreversibility of the outcomes of past decisions that dominate any process of change. It is this irreversibility of past decisions that makes history an indispensable dimension of economic theorising (as epitomised and underwritten by Marx and Keynes in their works, with Joan Robinson trying to construct a bridge between the two great economists, though tilting her own thesis towards the

former by her emphasis on social relations and towards the latter through her stress on uncertainty and expectations of the future).

270

Studies in Economic Analysis and Policy in Retrospect References

1. 2. 3. 4,

A.J. Arrow’s article in Q.J.£., March 1974. M. Blaug, Economic Theory in Reptrospect, Vikas, Delhi, 1982 (3rd ed). D. Dewey, Modern Capital Theory, Columbia University Press, 1965. P. Garegnani’s articles in QO.J.E., Vol. LXXX and Review of Economic Studies, Vols. 36837. ;

5. G.C. Harcourt, GCAWPe972,

Some

Cambridge

Controversies

in the Theory of Capital,

6. G.C. Harcourt & N.F. Bungay, 1971 (articles

Laing (eds), Capital and Growth, Penguin Books, by K.R. Bharadwaj, A. Bhaduri, N. Kaldor, L.L. Pasinetti, and Joan Robinson). 7. M. Hollis and E.J. Nell, Rational Economic Man, CUP, 1976 reprint.

8. R.L. Meek’s article in Scottish Journal of Political Economy, Vo}. 8 (1961). 9. Joan Robinson, Economic Heresies, Macmillan, 1972 reprint.

Q. Joan

Robinson & John

McGraw-Hill,

Eatwell,

An

Introduction

to Modern

Economics,

1973.

11.

Joan Robinson, Further Contributions To Modern Economics, Basil Blackwell, Oxford, 1980. 12. A. Roncaglia’s article in S. Weintraub (ed), fodern Economic Thought, Basil Blackwell, Oxford, 1977. 13. A. Roncaglia’s article in J.R. Shackleton & G. Locksley (eds), Twelve Contemporary Economists,

Macmillan,

198].

14. P. Sraffa, Production Of Com nodities By Means Of Commodities: To A Critique Of Economic Theory, C.U.P., 1969.

Pelerud

Index I.

AUTHOR

Abramovitz, M., 156, 185, 192 Allen, R.G.D., 135 Allen, W.R., 15, 138, 148, 206 Ando, A., 26, 30

INDEX

Boumol, W.J., 135-6

Bowley, M., 78-80, 90, 246, 251 Braithwaite, R.B., 30 Braybrooke, D., 58

Breit, W., 202

Arrow, K.J., 136, 270

Bronfebrener, M., 135 146,

Ashley, J., 251 Austin, J., 4

Buchanan, D.H.,

159,

167,

182,

192, 245 Ragehot, W., 230

Burton, J.F., 208

Bain,

Bushaw, D.W., 58

J.S., 107, 109, 157, 173, 189, 190,

193, 223, 228 Baldwin,

Bye, R.T., 153, 159, 171-3, 190, 193

L., 60, 88

Baran, P.A., 210, 225

154, 156, 171-2,

Barback, R.H., 150, 164, 175

@airneross, A. 107; 186-7, 189, 192-3

Bauer Ls,

Cairnes, J.E., 99, 146, 148, 200, 219

OS

Baumol], W.J., 58, 135, 184, 192 Beales, H.L., 66, 72, 88 Beers Ves loss las

Bell, J., 138, 140 Benham, F., 156, 172, 186, 192, 213 Bentham, J., 4, 8, 83 Bhaduri, A., 136, 270 Bharadwaj, K.R., 270 Blaug, M., 5, 6, 14, 22, 30, 66, 135-6, 140, 150-1, 153, 158, 164-6. 173-5, 178, 191, 19586, 200, 202, 205-6, 209; 219, 226, 251, 268, 270 Bohm-Bawerk,

E.

von,

101,

Cannan, E., 6, 14, 95,

Carlyle, T., 52

193,

89, 160, 199, 248,

177,

188-92

Boulding, K.E., 18, 28-9, 31, 52, 135, 153-4, 171, 178, 191, 211, 225-6 |

Carnap, R., 17, 29 Garre]Ar.255,30) Carver, T.N., 111 Cassel, G., 166-7, 175, 214 Catherwood, B.F., 110, 148, 150, 161-2, 173-4, 233, 248, 251 Chadwick, E., 80 Chapman, S.J., 109-11 Chamberlin, E.H., 175, 185

159,

Christenson, C.L., 153, 171, 225

106,

114-5, 174, 213-4, 254, 260 Bonar, J., 66, 73, 89, 90, 174 Bottomley, A., 153-7, 171-3,

97, 101, 108-12,

140, 150, 153, 156, 158-60, 162-64, 171-74, 191-4, 203, 205-7, 209, 251

120, PAIS.

Claire St., O., 151, 161, 194, 205-7 Clark, J.B., 98, 115, 148, 214-5, 254-5 Clark, J.M., 151, 166, 202, 208 Clower, R.W., 58 Coats, A.W., 77, 84-7, 90-1, 201-3, 208 9 Cobbett, W., 72 Commons, J.R., 153, 179

oi

Studies in Economic Analysis and Policy in Retrospect

Comte, A., 12, 52 Cournot, A.A., 167 Currie, J.M., 178, 185, 191-2

Goethe, J.W.V., Gordon,

11

B., 71, 90

Graaff, J. de V., 127, 134 Gray, A., 111, 142

Das Gupta, A.K., 46 Davenport,

Gurwitsch, A., 7, 18-9, 23-4, 29-3), 5d

H.J., 107, 112

Davidson, P., 136, 225 Havtie, DiC.) 135, 1935 Dut, Tez elo? Hale, RL, 175, 192 Hall, R.L., 46, 58 Haley, B.F., 152-3, 155, 171-2, 178.,. 187, 19:1-2,.2125221, 226) .228 Haney, L.M., 3, 14, 60, 65, 83, 89, 148, 150-3, 162, 168, 171-2, 174-5, 186-7, 192, 194, 196, 193, 205-7, 235, 249, 251

Debrue, G., 134

Dewey,

D., 134, 136, 270

Dobb, M.,

73, 90,

101,

108,

159, 153, 156, 171-4, 193,

110-11,

196,

205,

2095 215, 219, 2262227, 251 Ducros, B., 136

Dunlop, J.T., 207, 22°, 228 Durbin, E.F.M., 36

Eagly, R.V., 230, 251 Earley, J.E., 24, 30, 58, 251 Eastham, J.K., 157, 166, 181, 189, 192r3 Eatwell, J., 230, 240, 252

Hanson,

N.R., 17, 29 Harcourt, G.C., 136. 270

Ui3y

Harre, R., 17, 29

e175;

Harrod, R.F., 46, 58, 255, 270 Hayek, F.A., 22, 30 Hazlitt, W., 72

Edgeworth, F.Y., viii, 115, 156, 213

Ekelund, R.B., 237, 251 Bilis esse 92-9. 171. 17-2 191 206; 927 Ely. 3.7... 114 Eucken, W., 11, 14, 21, 30 Euler, L., 128-9, 131-4 Fellner, W., 110-11, 135, 153, 179-81, 191-2, 197, 205-6, 221-2, 229, 228, 233, 251

Heilbroner, R.L., 14, 58, 62-3 Heimann, E., 102 Hempel, C.G., 16, 18-9, 23-6, 29-31 Henderson, H.D., 46, 58, 156-7, 172, 179, 187-8, 193, 227 Herbert, R.F., 237

Hermann, F.B.W., 247 Hicks, J.R., 14, 36, 46, 50, 58, 108-10 115,.133, 135-6, 156, 162, 174.17 194, 198, 212, (219, 221, 226, 227, 228

VAIS 212,

Ferguson, C.E., 134-6

Ferra, F., 138

:

Hobson, J.A., 212

Finkelstein, J., 235, 251 Fisher, F.M., 30 Fisher, f., 254

Hoff, T.J.B., 154, 186, 192

Fleming, M., 134, 188, 193 Fossati, E., 58, 153, 156, 171-2, 188

Hume

Fraser, U.M:,

2istslen30sc

Hollis, M., 270 Hollander, S., 65, 88, 157, 173

50.

110-11, 149-50 Friedman, M., 48-9, 58, 201, 208, 229 ’

104-7,

223,

151, 203,

Jaimes, P., 245, 251

Frisch, R., 119, 168, 176

Fusfeld, D.R., 58, 150 Garegnani, P., 270

Gide, C., 14, 58, 95, 108, 148, 160, 164-5, 167, 174-5, 177

D., 5, 8, 158

Hutchison, T.W., 14, 110, 150, 159, 164-6, 173-5, 191, 196, 205, 209, 226

:

150-2,

Jenkin, F., 213 JEVONS;EW..S.3) lvls, 1955235 292308 165, 167-8, 175, 181, 213 Johnson, H.G.J., 46, 58, 227

Johr, W.A., 46, 58

11155

273

Index Aaldor, N., 28, 31, 47, 58, 98, 109, 133, 135, 147, 153, 161-5, 169, 171, 174-6, 191, 197, 199, 203, 205-6, 209, 233, 270 Kalecki, M., 127, 135 Kapp, K.W., 60 Kapp, L.L., 60 Kaplan, A., 18, 20, 23-4, 29, 30 Kant, I., 3

Karman,

T. von, 56

Keirstead, B.S., 251 Kemeny, J.G., 18-9, 23, 25, 30

Kerr, C., 194, 205, 215, 226 Keynes, J.M., viii, 5, 9, 14, 39, 43, 55,

132, 232 Kirkaldy, A.W., 109 Knight, F.H., 58, 98, 105, 110, 138, 230, 251 Kolthammer, F.W., 4 Koolman, G. 111 Koopmans, T.C.,

107,

21, 25, 29,

109,

30, 48,

57, 114, 119, 134, 135 Laing, N.F., 270 Landreth, H., 86-7, 91

Launderdale, J.M., 97 Lekachman, R., 61, 63, 72, 82, 88, 90, 91, 148, 174 Lerner, A.P., 40,

IBIS, 7P4y AU

191, 193 Lester, R.A., 205, 222, 226 Lewinski, J.S., 96, 97, 100, 108, 110,

111, 194, Lipsey, 157,

140, 141-2, 152, 171, 177, 190, 205 R.G., 58, 112, 134, 153, 155, 171, 173, 178 83, 189, 191, 193

Longe, F.D., 195, 200

Lowe, A., 7, 10, 19, 29, 50, 58 Macfie, A.L., 36 Macgregor, D.H., 151 Malthus, T.R., 5, 8, 9, 14, 66-8, 96, 98, 101, 138, 140-44, 159, 161-3, 167, 181, 194, 196, 2 .7-8, 218, 229, 233, 241, 244-5, 251, 258 Marchal, J., 136

Marshall, A., 2, 8, 9, 14, 19, 20, 23, 28-32, 34, 36, 46, 51, 54-5, 58, 87-8, 91, 106-7, 114-15, 167, 169, 170, 175-6 182, 199, 206, 215-19, 226, 227, 261 Martin, A., 156, 173, 188, 193 Marx, K., 10, 102, 105, 141, 153, 177, 194, 258, 259, 261, 265, 269 McConnell, J.W., 140, 148, 162, 174 McCulloch, J.R., 7, 9, 14, 78, 90, 97-9, 101, 141, 147, 162, 163, 174, 196 Meade, J.E., 40, 109-10, 133 Meek, R.L., 259, 261, 270 Menger, C., 115, 165, 213 Meyers, A.L., 180, 182,

191-2, 184, 226, 228 Mill, J., 10, 14, 75-7, 97, 101, 103 Mill, J.S., 4, 7, 9, 10, 14, 18, 28-9, 31, 81-4, 90-1, 96, 99, 101, 103-4, 138, 142, 145-6, 148, 159, 163-5, 167, 174, 194-6, 219, 233-4, 247-50, 251 Mishan, E.J., 186

Mitchell, W.C., 84, 91 Monroe, A.E., 173

Montchretien, A., 1 Murphy, J.A., 191

Myint, 135, 206, Myrdal,

H., 5, 14, 45-6, 56, 58, 109, 150-1, 156, 159, 171-3, 197, 201,, 208 G., 30, 58, 151, 162, 174

Nagel, E., 22-3, 25-6, 30 Neff, F.A., 66, 89, 168, 176, 251 Nell, E.J., 135, 270 Nevin, E., 223, 228 Newman, P.C., 14, 110, 148, 151, 168, 176 Newton, I., 7 Northrop, F.S.C.,

20-1,

26-31,

47-8,

51, 58 Oser, J., 140, 251

Pareto, V., 35, 52,110, 115, 167, 177, 178, 186 Pasinetti, L.L., 133, 233, 270

Marshall. J., 136

Patinkin, D., 229, 251

Marris, R.L., 46, 58

Patterson, E.H., 111

"274

Studies in Economic Analysis and Policy in Retrospect

“Peacock,-A.T.,

Roncaglia, A., 270

175

Roscher, W.G.F., 32

‘ Pearson, C.H., 36, 175

Rothschild, K.W., 204, 209, 221, 228 Ryan, J.A., 158, 173, 189, 193

Pen lOc loo Perlman, R.,' 213, 2225;226s 228 Perroux, F., 102

222,

Petty, W., 103, 158 Pierson, F.C., 226 Pierson, N.G.,

Samuelson,

175, 212

Pig u,A.C.,-30; 40, 46, 52-3 54, 58, 110, 115, 184, 209, 218-20, 227 Place, F., 77 Popper, K.R., 1€-9, 22-3, 29, 30, 58 Preiser, E., 1/53; 171

Quesnay, F., 1

P.A., viii,

Samuels, W.J., 13, 15, 84, 91

Say. J-B:, 63:8, 135793. 95, :92103-45 138, 140, 143, 147, 159-60, 161, 194, 233, 238-9 Schmitz, A., 191 Schneider, E., 153, 171-2, 181-2, 191-2 Schumpeter, J-A.32-2,

Radomysler, A., 46, 59 Read, S., 97

Reder, M.W., 136, 153, 171;. 178; 185 ’ 191, 210 Redfield, M.P., 17, 29: Ricardo, D., 4, 6, 9, 10, 13-4, 73-4, 90, 96, 98-9, 101, 103, 140-44, 145, 147-8,

158-9,

164,

167,

170,

186, 196, 206-8, 233, 239-43, 247, 249, 252-3, 257-9, 262, 268, 270

180-1,

245, 265,

Rickert, H., 35, 49 Richards, R., 190

Rima, I.H., 195, 200, 202, 205-6, 208-9, 243, 252 Rist, C., 14, 58, 95, 108, 148, 150-2, 1€0, 164-5, 167, 174-5, 177 Robbins, L., ix, 3-6, 13-4, 17, 19, 20, DDS 205. 275 295 300353. 40, D1 Sato) 73, 85, 89, 91, 109, 112, 144-5, 150, 197, 201, 206, 208, 242 Robertson, D.H., 14, 109, 153-6, 170-2, 176, 180, 186-7, 191-3, 203, 209, 212, 2225 227.228 Robertson, D.J., 225 Robinson, J., viii, 8, 14, 26, 30, 106, Vit 1STSSe 3601505. 1S) lo seei55156, 171-2, 177, 181-3, 185, 186-88, 192-3, 223, 233, 240, 254, 259, 265, 269, 270 Robson, J.M., 91 Roll, E., 14,-46, 59; 105, 108, 151, 165, 168-70, 175-6, 195, 205, 252

105, 133-4, 136,

153, 171, 179, 186, 191, 227-230, 252

15,952,

595061.

88 94,96, 97, 101, 103-5, 107-11, 115, 134-5, 138, 140, 149-51, 153, 156, 159-61, 164-6, 170-1, 173-5, 178, 191, 194, 196-8, 203-6, 209-11, 226, 229. 234,235, 237, 252 Scitovsky, T., 46, 59, 127, 135

Scott, WA:

15, lab.

196 72 205.2083

252

Seligman, B.B., 107, 112, 167, 169, 175, L762 17819152 Ve 215 522550227 Seligman, E.R.A., 175 Senior,

N.W.,

9, 10,

35,

90

96, 99,

101, 103, 142-5, 148, 163-4, 233, 246-8, 250, 252 Shackle, G.L.S., 59, 114, 134-6, 153, 156-7, 171-2, 188, 193 Shove, G.F., 114, 151, 161, 164, 169-70, 174-6, 218

174, 150,

168,

Sidgwick, H., 11, 45, 54 Silbertson, A., 135 Simon, H.A., 30

Singer, H.W., 46, 58 Skinner, B.F., 18, 21, 29, 30 Smith, A., 3, 4, 6-8, 13, 61-2, 63-5, 89, 94-6, 98-103, 138, 140, 143-4, 146, 159-60, 164, 167, 173, 181, 194, 196-7, 201-2, 206-8, 229, 233-4, 236, 242, 248, 250, 252 Smith, K., 68-9, 71, 89 Smith, V.L., 135

Smolensky, E., 225 Solow, R.M., 21, 30, 51, 59, 133, 136 Souter, R.W., 36

Pat)

S Index Sowell, T., 66, 70, 72, 82, 85, 89, 91 spanns OF 7), 125 215, 146; 148," 1162,

Triffin, R., 167, 175, 178, 191, 252 huckets

G.S..5

108,

slOneiia2

155,

GSMO si Deel ole Tugwell, R.G., 171, 175

174, 194, 205

Spengler, J.J., 15, 138, 148, 206 Spiegel, H.W., 15, 67-9, 89, 97, 109-10, 1SSetla2eI 1a 1972005 - Sraffa, P., 73, 90, 233, 243, 259-62,

Turgot, A.R.J., 94-5, 103, 196

Turvey, R., 154-5, 172, 189, 190, 193 Tyszynski, H., 46, 59

265, 267-9, 270 Stackelberg, H. von.,

154-5,

157,

167,

171-2, 175, 186-7, 192 Stigler, Gil, cos0 ole Donel hl19

127,

134-36, 138, 148, 149, 154-5, 172, 173, 178-80, 189, 191, 193,

158, 197,

205) 213,.21951227, Stonier, A.W., 135, 153, 171, 182, 192

Streeten, P., 46, 59

199

Youtsler,

Il.

SUBJECT

Abstinence, 231, 233-4, 246-8, 250, Absraction (s), 2, 8, 9, 17-8, 33, 47 Accumulation, 1, 8, 132, 199 act of, 247 capital, 199, 202, 241-6, 253-6 passion for, 245 :

Adding-up problem, 129, 230, 235

non-cost, 187 non-pecuniary, 186

Whitbread, S., 69-71 Whitehead, A.N., viii, 52 Whittaker, E., 195, 202, 208, 252. Wicksell, K., 109, 111-2, 129, 166, 214, 215 Wicksteed, P.H., 110-]1, 115, 129, 166, IBS Sr Wotton, B., 220, 221, 227-8

“Tress, R.C., 46, 59

Advantage (s) differential, 182 net, 157, 189, 215, 224

Weber, M., 27, 31, 35

Wieser, F. von., 166, 175, 213

Toynbee, A., 60, 66, 88-9

Administration (s), 2

Walker, F., 230

Walras, L., 52, 110, 114-5, 129 Walter, A.A., 136 Waughs Abo, 155) lool iian liso, 193 Weintraub, S., 153, 156, 171-2, 175, 178, 180, 185, 188, 191-3, 220-1, 227-8 West, E,G., 85, 91, 181

Suranyi-Unger, T., 175 Swan, T.W., 136

Taussig, F.W., 115, 214 Tayler, G.W., 226 Taylor, O.H., 150, 166, 174, 196, 205-6, 218, 227 Thimm, A.L., 235, 251 Thornton, W.T., 195 Thunen, J.H. von., 115, 167-8 Timbergen, J., 4, 46, 59, Torrens, R., 97

Vroey, M. De., 233, 251

255

J.S., 210, 212

INDEX

Advice economic, 40, 44. expert, 43

professional, 43 Advice simpliciter, 41 Age of Reason, 12 Aggregative approach classical, 221 Keynesian, 221 Agriculture, 1, 97, 181, 224,

253 Allocation, 255

Analysis/theory

240,

244,

276

Studies in Economic Analysis and Policy in Retrospect

abstract, 4, 85

aggregative, 43 causal, 24 classical]; 230 dynamic, 236 economic, viii, 1-4, 6-8, 25, 33, 35,

39-40, 85 functional, 18

Capital, 67-8, 76-9, 93-4, 96-111, 114, 129, 131-3, 145, 196-7, 207, 229-52, 255-6, 260, 266-8 aggregate, 256, 258 circulating, 195-8, 249

input-output, 42, 129

linear-programming, 129 macro-economic, 185 micro-economic, 133 normative, 48

definition of, 230 demand for, 246 disposable, 246

positive, 48 psycho, 22 = qualitative, 42 quantitative,'16, 32, 35, 38, 42, 44

theoretical, 36, 54, 196 Anarchism, 9 Anatomy, 36

and

employment of, 238-9, 243 fixed, 130, 230, 241, 249 intensity, 260, 266 loanable, 238 productivity of, 232, 243, 246-8

maiginal product of, 232, 244 ©

Applied economics, 4 Approach demand

Calculus, 223 Felicific, 8 pain-cost, 216 Cambridge American, 257 English, 257

supply,

no-rent, 229

130,

239 econometrc, 40-1

individual, 292 Marxian, 260 prescriptive, 40-1

194-5,

return on, 233, 235-6, 248 stock of, 196-7, 199-200,

230, 234,

236-7, 242, 244 supply price of, 247 variable, 230 working, 130, 254

yield of, 248

taxonomic/ad hoc, 22, 40-1, 54

Capital-labour ratio, 130

value, 210

Capital-reversing, 134, 256, 269 Capitalism, 10, 84, 199, 206

Approximation, 28 Art, 47 Assets, 254-5 Astrology, 34 Astronomy, 34, 49 Authority, viii

Capitalist (s), 93-4, 96, 103,

141,

233-6, 239, 241, 253, 265, 267 Certainty, 32-3

Charmed Circle, 220 Chemistry, 11, 51

micro, 7, 19

China, 244 Choice, 259 Circular flow, 253 Citizens, 220

profit-maximising, 131

Class (es), 74, 78, 220, 247, 258

Behaviour, 17

rational, 27

capitalist, 99, 236

social,25

economic, 93, 104-5, 138, 149 functional, 93

Benthamism, 80 Belgium, 97 Biology, 28 Budget line, 120 Bureaucrats, 225

high/higher, 81-2 labouring, 5, 61-9, 72-7, 80-3

low/lower, 66-9 middle, 81

230,

Index

277

poor, 61-3, 61-77, 80-4 privileged, 83 productive, 1, 93

Conflict class, 36, 64, 258

between profits and wages,

proletariat, 99 propriety, 93

rentier, 1 social, 1, 77, 86-7,

social, 253 of choice, 49 93, 99,

104-5,

158, 267 sterile, 1, 93 sub-, 268 under-, 225 working, 65, 74, 87, 106, 269

Class-struggle/war, 224. 267 Co-efficient capital 130 fixed, 116, 255, 268 input, 167 variable, 116, 255 Collective bargaining, 214, 219-21 Co-operatives, 220 Combination, 64, 116, 121, 215, 220, 230 formal, 215 informal, 215 input, 119 least-cost, 120

231,

capital, 199 capitalist, 241 personal, 242

self-, 157 unproductive, 100, 199 Corn chs 8, 9, 11, 13 & 14

Corporation, 233 Cost (s), 60, 93, 139-40, 201, 233, 255, 256 alternative, 255 amortisation, 57, 188

average, 129 constant, 146, 206 construction, 170 depreciation, 170 diminishing, 255

least-outlay, 122 optimum, 126 Commodity (ies), 234, 241-4, 262-3, 265 basic, 261

displacement, 255 fixed, 223) 253, 260,

composite, 261

investment, 253-4 non-basic, 261 standard, 261, 269 ‘Comparative statics, 268 79,

Conservatism, 9 Constants, 35 Consumer, 236, 241, 244 Consumption, 1, 9, 187, 198, 205,

242, 246-8, 253-5

Classicals/classicists/classics, 229

Competition,

244-5,

247, 249

236,

real, 179, 236-7, 239, 246, 253, 265 supply, 157 245,

250,

253,

256 free, 13-4, 145, 194 perfect, 27, 120, 129,

transfer, 184

Cost curves average, 129 132-3,

213,

260 Condition (s), 22, 25, 32, 34, 35. 62, 181 demand-and-supply, 189 ideal, 22 necessary, 182 socio-economic, 60 technical, 240

increasing, 225 maintenance, 170 marginal, 129, 143, 189, 260 money, 216 non-pecuniary, 223 pain, 179, 236

constant,

145-6

fixed, 223, long-run, 129

marginal, 129, 223

production, 130 supply, 188-90 Cost-of-living, 63, 79, 250

Cultivation, 68, 81, 242 extensive, 163

Studies in Economic Analysis and Policy in Retrospect:

278

Distribution, 6-8, 95-7, 101, 105-6, 108, 113, 129, 133, 138-9, 141-3, 147, 148-9. 152-3, 160, 168, 207, 253-5, 258-61, 265

intensive, 163 Country (ies), 61, 63 developed, 230 Tich;,63.0/ 35075 poor, 75 underdeveloped, 43 Crises, 36, 250

functional, 267 pseudo-, 6, 140 Distributive shares, 92-3, 107 Disturbing causes, 3 Divine Plan, 1

Curve (s) demand, 144, 186

iso-product, 134

Division of labour, 65, 260 Double-switching, 134, 256 Dyad, 103-4, 107-8

supply, 144 Custom(s), 10, 142

Data, 17, 19, 21, 28, 35, 44-5, 201 economic,

37

empirical, 20, 47 independent, 186 observable, 57

Earning (s), 70, 185-6, 247 of labouerers, 240, 247 transfer, 179-80, 182-6

Deduction /deductive

Economic adviser, 37, 39, 45, 54 Economic change, 12, 40 Economic freedom, 5, 13

causal-explanation, 17 consequences, 27

hypothetico-, system, 17-8 logical, 246

Economic

reasoning, 17 theories, 27

Demand, 9, 35, 175, 244-5, 259, 268 derived, 155, 186, 217

143,

169211;

232 ex ante, 199 expost, 199

investment, 245, 247

Demand-and-supply, 35, 79, 87, 160, 163, 165, 167-8, 173, 194, 196, 199, 216, 234 fluctuating, 206

Jaw of, 153, 168-9, 245

Man, 12, 14

Economic statistics, 38, 41 Economic well-being, 1, 74, 76

method, 2, 32

effective/effectual,

Dynamics, 6, 12, 20, 27, 42 macro-, 139 theoretical, 27

Economics analytical, 27 applied, 4} normative, 49 positive, 34-5 price, 49-50 pure, 49-50 scientific, 52 sizo-phrenic, 34

theoretical, 33

welfare, 34-6, 41-2, 52-4 Economies of scale, 115, 130-1 Economy capitalist, 230

Deposit banks, 247

classical, 13, 52, 85 market, 119

Derivative, 237 Development, 1, 4, 43 economic, 6, 37 Differentiation, 260

no-surplus, 260 political, 1-2, 6-11, 13, 40, 43, 67, 72, 79, 85, 92 surplus-generating, 260

Democracy, 11, 84, 220

Disequilibrium, 140, 183 Disharmony, 43

Dismal science, 3

surplus-less, 260

Education, ch. 5 Elasticity (ies)

219

Index average, 171

Expansion path, 125, 128 Exp ctation (s), 7, 231, 250, 269 Expenditure, 229 Experience, 3, 12, 17, 19, 25, 27, 44 scientific, 12, 44, 45 Experiment (s), 19-22, 24-6, 34-5, 59 Expert. 12045 Explanation (s), 3, 6, 16-8, 20, 25-6 causal, 3, 24

average cost, 129

dimand, 35 Marginal cost, 129 substitution, 129-31, 133 supply, 35, 129, 146, 202 Element (s), 4, 12, 17, 43 constant, 187 | pecuniary, 189 non-economic, 36 non-pecuniary, 189

Facts, 8-11, 17, 19, 25, 33, 35, 39, 44

Empiricist, 28 Employed/Employment, 1, 4-5, 6-8, (SO, 1s PAVERS 224| Be. DOR yey) full, 36, 43, 206, 258

England/Great

Britain/United

King-

dom, 42, 97, 244

Teta

36

of

produc-

tion, 16, 18, 22, 42, 188-9, 261-3 classification of, 134 fixed, 156, 185 heterogeneous, 177, 184 homogeneous, 177, 182, 211

3,

193-4,

7. 233

184,

186,

204,

238,

liquidity, 238 non-economic, 27, 45 payments, 132

risk, 238

marginal, 239

specialised, 162, 179-80 variable, 253

productive, 92-3

social, 93 Environment, 28, 33 Equality, 36

Factor-price frontier 133, 258

Firm(s), 266

Equilibrium, 5, 9, 36, 86, 154, 168, 177, 183, 186, 189-90, 206, 222, 229, 248, 260, 269 competitive, 40 full, 220

159, 214,

Fluctuation (s), 36, 165, 189,

244, 248 business, 45 cyclical, 42 Forecast (s), 27, 37-8, 45

Force(s), 24, 175, 229, 250 economic, 39, 54

general, 258, 260 long-run, 203, 232, 258 partial, 260 perfect, 213

extra-systematic, 24 intra-systematic, 24

mechanical, 2 natural, 139 pull, 225 real, 229, 248

static, 131-2

temporary, 250 Euler’s Theorem, 129, 131-3 Europe, 82 Evidence, 26, 28, 35, 41 statistical, 35 Excess capacity, 7, 130 Exchange, 9, 96, 137-9, 143, 186, 261, 263, 267

normative,

Factor(s)/Means/Agents

cost, 179-80

Enlightenmert, 2 Enquiry (ies), 2, 4, 6 ad hoc, 3 empirical, 25 social 26 systematic, 4, 85 Enterprise/Entrepreneur(s),

descriptive, 36 historical, 8

Formula, 17 France, 82 Function(s), 7, 37,

147,

168,

cost, 126 economic,

38

280

Studies in Economic Analysis and Policy in Retrospect Idealism, 35 Idealization(s), 27

input-output, 131 preference, 210 transformation, I18

Implications, 19, 33, 36, 39-40, 57 normative, 36

utility, 269

Impoverishment,

Generalisation (s), 16, 23, 26, 33,

54,

68, 167 positive, 49

Generality, 32-3 Generation (s), 3, 80, 82, 84, 89, 204,

216 of labouerers, 81 Gestalt, ix Geometry, 10 German historians, 4

Goods, 145, 197-9, 201, 236 capital, 170, 230-1, 234, 266 capital-intensive, 267 consumption, 206, 232, 267 durable-use, 180 intermediate, 246 non-wage, 240, 246

produced, 187 physical,

236

wage, 240, 242, 246, 269 Government, 5, 7, 13, 38, 65, 72, 78-81,

229, 247 modern, 38

self-, 83, 85-6 Great Antimony, 13 Group‘s), 258 non-competing, 99 Group interests, 225 Growth, 1, 5-6, 42, 243, 256

Guidance/Guide,

11, 41-2

Guild, 224

34, 66

self-, 87 Improvement, 5, 66, 68, 70, 86-7 long-run economic, 80

in machinery, 243 technical, 3 Income: 6.) 1615 163), 1659232 250 effect, 157, 188, 217, 223, 231

sm2ou8

equalitarian distribution of, 41 — level, 232

per capita, 198 real, 211, 231 triads of, 92 Indeterminateness, 212, 219 India, 244 I: difference curve analysis, 120 Individualism, 4-5, 12, 20, 23-4 Induction, 8-9, 12 Inflation, 267 Information, 267 Innovation, 231, 251

Input (s), 113-4, 118, 121, 129, 260-1 fixed, 163 labour, 253 limitational, 116 variable, 163 Institution (s), 5,6, 9, 10, 13, 18, 37, 41, 241, 246 Intellectuals, 55, 78, 84, 225 Instensity, 136

Interest/Interest theory, 92, 94, 104, 134, 137, 229-52, 254, 256-8, 266 abstinence, 234, 246

Habits, 9 Harmony, 11, 43, 258 Hollard, 97 Households, 266 Humanities, 4 Hyberbola (rectangular), 117 Hypothesis, 16, 18, 22, 26-8, 32-3, 47-8,

SHB BIA, G45 ZA0) basic, 28 factual, 195 testing of, 49

as a proxy for profit, 237-8 high. 235 low, 235 market, 231, 239 productivity, 230 real, 231 Interventionists, 5, 36, 65, 82

non-, 21 Introspection, 3, 47, 49 Invention (s), 230-1, 242 Investigation, 11, 17, 21, 25, 33, 35

281

Index Investment, 43, 79, 102, 254 capital, 235, 238, 243 marginal, 243-4

133, 229-52,

re-, 240 Invisible Hand, 34, 64 Instruments, 13, 35, 84

supply, 194, 198, 203-4, 206-7, 213, 216, 221, 223, 241, 244-5 unproductive, 79, 197, 206, 221 unskilled, 84 wage-elastic supply of, 207

Job-cluster, 225

Judgement (s), 10, 22, 26, 41, 44, 55

34, 36, 39,

fiduciary value, 46

scientific, 53 value, 10, 40, 45, 53-4 Justice, 43, 65, 250 Knowledge, 2, 4, 8-12, 16, 19, 20, 25-6, 32-3, 36, 44, 190, 215, 266 engineering, 113-4 technical, 113-4, 131, 255 scientific, 4

Labour, 6, 16-20, 78, 86-7, 93-111, 114, 129, 131-3, 137, 141, 143, 145, 149-50, 169, 195-224, 231, 238, 240-6, 253-5, 257-9, 261, 263, 265, 267-8 as a commodity, 87, 194, 209 backward-sloping supply curve of, 200 condition, 30 cost of, 249

demand, 199, 203-4, 212, 221, 241, 244-5 embodied; 242 efficiency, 249

Land, 92, 94, 96-111, 114, 132, 137, 182, 231, 244, 246-7, 254, 258, 261 marginal, 240 no-rent, 240 scarcity of, 242

240,

Landlords, 75, 93-4, 96, 98, 141, 247 Law (s), 2, 4, 7, 9, 11, 22-4, 41 biological, 21

ethical, 34, 45, 56

206-7,

209,

grades of, 210

Corn, 9 chemical, 21 economic, 13, 36, 234 general, 22

moral, 3 of motion, 7, 10, 19, 230 natural, 1, 3, 11, 12, 16, 140, 214

physical, 3, 16-7, 50, 61, 65-6, 80, 88

macro, 256 micro, 256 Linear programming,

42,

non-, 42

Liquidity, 229 Liquidity-preference, 232 Loan (s), 229, 237-9

Loanable funds, 229-253 demand-and-supply of, 247 Logic, 32, 51 Loss (es), 233, 235, 238

Machine(s)/Machinery, 230 Macro-economy,

1975-206,

reserve/reservoir, 162, 206 scarcity, 206, 245

217,

115, 127-8,

136

lowest species of, 207

221, 240, 245

70-4,

sceintific, 25, 32 Level

mobil'ty of, 223, 225 perpetuation of the race of, 207-8 price, 73-74, 194, 196-7, 201, 207, 217, 219, 222, 244 79,

217,

Laissez-faire, 9, 75, 86,.92, 94, 96, 103

Italy, 244 Treland, 79

productivity,

210,

180,

185,

196, 199-

2090, 211, 219 Macro-dynamics, 139 Magnitudes, 25, 34, 39, 196

Manor, 224 Maladjustment, 42 Margin, 154, 256, 168-9, 179, 187-9 extensive, 181

282

Studies in Economic Analysis and Policy in Retrospect

intensive, 187 no-interest, 166 no-rent,

166

no-wage, 166

product-changing, 181 Marginalists, 164-5, 256 Marginal

Productivity

Theory,

131-3,

155, 210-16, 218, 220-1, 254 Market, 241:

Marxian, 259 Ricardian, 265 Sraffa, 262 theoretical, 28, 48 Money, I, 229, 232, 234, 239, 258 as a store of value, 248 quantity of, 248 value of, 239 Monied man, 236

Monopolist/Monopoly (ies)

capital, 267

bilateral, 190

competitive, 85, 179-80, 210 commodity, 232 consumers’, 147

land, 158 natural, 268

farm, 259 factor, 230, 267

private, 5 Monopsony, 212

imperfect, 215 loan, 229, 232

Mood imperative, 2, 47 indicative, 2

producers’,

Moral, 3, &, 52

labour, 195, 215, 217, 224,. 267 147

product, 230, 267 Market-plus framework, Maximum/Maximisation,

non-, 3

13 4, 6, 16,

34,

Morality, 220 Morphology, 259

166 of profit, 211 Marians/Marxists, 4, 35, 36

Motivation! Motive (s), 12, 24, 28, 34, 77, 80, 87, 242, 267

Mathematics,

profit-seeking, 12 Multiplier, 38

humanitarian, 8, 61

8. 23, 25, 32-3, 51

Measurement, 1, 39, 179 Meliorism, 9 Metaphysics, 1, 4, 5 Metapolitical, 39

National product,

dividend/income /output [ 38,

104,

106,

133,

approximation, 57 alternative, 6, 11

National revenue, 244 Nature, 2, 7, 11, 246

algebraic, 42 arithmetical, 42

Natural Order, 1, 2, 12, 50, 133 Neo-classics/classcists/classicals, 210, 257-9

behaviouristic, 20 econometric, 42 hypothetical deductive, 7, 12, 19 of isolation/abstraction, 12, 57 quantitative, 22 scientific, 42

Neo-marginalist theory, 166 Neo-neo-classicals, 257-9, 268

zero, 23

84, 256 Model (s), 16, 23, 45, 56-7, 240

1-3,

26-7,

Neo-Kantist philosophy, 35 Neo-Keynesians, 133, 257-9, 266-8

unity of, 18

Mercantilism/Mercantilists,

137,

142, 163, 190, 233, 257, 268

Method, 4, 18, 20, 48, 84

64,

Net output/product, 253, 258, 263-4 Neutrality, 12, 26 Norm (s), 1, 4! Netherlands, 42 Objective (s), 21, 41, 43

corn, 261

general, 43

fish, 261

social, 36

Index Observation, 3, 7-8, 12, 17, 20-1, 28, 32, 34-5, 38, 50

24-5,

incomes, 269

Occam’s Razor, 137, 164

problem of, 43 social, 34, 43, 80 Politics, 8, 11

One-man business,

Political Economy, viii, 1, 141, 143

Obsolescence, 156, 187 233

Open-market operations, 232 Opportunity cost, 175,

185, 255

Optimism, 231

Order, 13, 18, 39, 43 rational, 13 social, 80, 165 Organism, 7, 12 Organisation (s), 13, 83, 103-4, 106-7, 147, 223, 236 Output, 9, 16, 113-4, 118-9, 121, 129, 211, 240 Oscillation, 195, 203

classical, 92, 93, 107 English classical, 94 Population, 93, 197, 200, 207-8,

231,.

242-3, 249-50 abundant, 74 working, 208

Postulates, 3, 19, 20, 25, 27, 48, 50,. Sy testing of, 51 welfare, 53

Power, 162, 187, 224, 242, 246, 268 Poverty,

60-2,

64,

66-9,

70-2,

76-82,

84, 88 Pair of scissors, 259

Parables, 259 Paradigm (s), 233, 261 Parameter (s), 22, 186 Parliament, 73

:

Predictions/Prognostications,

20, 22, 25, 28, 22, 34, 40, 47, 50, 56 Preference function, 41, 210 Prescription (s), 4, 5, 6, 34, 40, 41, 53,.

Partial derivatives, 115

86

Patents, 249 Paternalism, 5 Pathology, 36

implicit, 54

Period classical, 92, 94, 97, 99, 106 long-run, 165 marginal, 216 short-run, 165 Philosophy, viii, x, 4, 7,.9, 11, 12, 18 economic, 253 individual, 1

political, 11 rationalist, 2 social, 11 Physics, 5, 18 Physiocrats, 1,2, 3, 7, 93, 100, 102, 140, 235 Physiology, 36 Plans, 267 Policy (ies); 1, 4, 5;-6, 13, 35,-38, 39, 40, 41, 53, 86 aim of, 42, 43 economic, 34, 37, 41, 42, 43, 45, 53 government, 53 guide to social, 53

3, 17-8,.

explicit, 54

Price, 3, 28, 61-2,

138, 142-5,

95, 118,

122, 129,

147, 194, 234-5, 253-4.

257-63, 265, 267, average factor, 140 demar.d, 164, 190, 215

equilibrium, 146, 254, 258, 260 factor, 165, 220, 259

general theory of, 165, 186 law of, 162 long-run, 268 market, 73, 140, 160, 261 money, 267 monopoly, 160 natural, 73, 143, 146, 147, 100, 253 normal, 253 product,

253

production, 261 relative, 131, 134, 241, 265, 267-9 reserve, 157-8, 189 stable, 43 supply, 183 transfer, 180,.183, 185

254,

260-1,

284

Studies in Economic Analysis and Policy in Retrospect

Principle (s), 2,{9, 10, 11, 12, 21, 24, 25, 45 continuity, 168

equi-marginal, 40 extrenum, 7 fundamental, 7 indeterminacy, 21 scarcity, 258

substitution, 168 utility, 5 Probability (ies), 22, 23, 32, 33

Problem (s), 13, 24, 34, 43 economic, 38, 85 mathematical, 25 practical, 39, 40 social, 37, 85

Produce, 244-5 Product/Productivity, 230 marginal, 128, 130, 134, 154, 163, 181, 189, 199, 220, 230, 244, 253, 260 marginal joint, 244 marginal private net, 178 marginal social net, 178 national, 133, 139, 140

net, 1, 214-5, 218-9, 231, 253 social, 95, 146 total, 102, 242 Production, 3, 6, 9, 79, 92, 96-8, 100-2, 104-7, 111, 114, 130, 141, 159-60, 183, 185, 200, 214, 244, 250, 253 agents of, 246

capitalist system of, 36 costs, 115, 163, 183-4, 196, 240, 245, 249 ‘entrepreneurial cost of, 244 expenses, 218 margin of, 212

net, 114 organisation of, 240 -over-, 73, 241 plan, 114

possibilities, 255 round-about method of, 232-3, 239 trial-intensive n ethod of, 233 value of, 245

‘Production function, 113-34

aggregate, 255, 257, 259 Cobb-Douglas, 113-29 concept of, 113, 129 continuous, 115 homogeneous, 254-5 linear homogeneous, 113, 127-8 matginal, 257 neo-classical, 115, 131-3

representative, 131 Production theory, 94-6, 100, 103, 137 Profit (s)/Profit theory, 6, 9, 76, 78, 83,

87, 92-6, 98-102, 104, 106-7, 129, 132-4, 139-42, 149, 197, 199, 229-53 accumulated, 248 aggregate, 238 as a residual, 235, 243-4 average, 236 competitive theory of, 233

dynamic, 233, 250 exploitation theory of, 237 gross, 235 high, 236 institutional character of, 234 minimum, 250 low, 245

net, 235, 237, 247 normal, 230 ratio, 234, 249 residual theory of, 233, 240

sharing, 83 stock, 239 Property (ies), 27, 36, 75, 97, 142,

149,

233, 247, 267 functional, 217 private, 13 rent-yielding, 185

security of, 75 specific, 27 Proportions factor, 26 scale, 261 Proposition (s), 4, 6, 27, 32-3, 41 abstract, 10 economic, 45

Psychology, 4, 23, 188 Qualifications, 18, 23, 33, 44 Quality (ies), 2, 33, 44, 162, 187, 245

Index

285

providential, 2 Quantity (ies), 9, 52, 182 constant, 9 economic, 40 measurable, 39

meaning and nature of, 152, 177 price-determined, 168-70, 180, 183-5 price-determining, 168, .180, 183,.

185 pure, 169, 177, 183

Que stions, 11, 12, 17, 24

quasi-, 215 scarcity, 182 true, 184 Replacement, 255

Rate (s)_ general wage-, 195 interest, 235, 237, 239, 244, 252

Reproduction,

market, 214, 239

natural, 73, 236 of accumulation, 242 of capital formation, 235 profit, 196, 234-5, 237-8, 239-52 saving, 197-9, 235-52 wage, 194, 200, 206, 212 Ratio (s) capital-labour, 130, 132 exchange, 261 Rationalisation, 24, 27, 37 anti-, 12-3

quality and quantity of, 6 real, 229 Returns, 248, 261 constant, 130 diminishing, 130,

non-, 27

Rationalism,

12

laws of, 129

Reality, 17, 36

maximum /aggregate, 190 Returns to scale, 115, 128, 130 constant, 129

economic, 13 empirical, 35

positive, 35 Recommendations, 41, 43-4 Recovery, 250

diminishing, 130 increasing, 126

Re-investment, 241 Relations, 19, 27,£ 35, £38, 42, 45, 81, 206, 249 causal, 26, 47, 56 production, 26 Relationship (s), 1, 20, 27,9.32, 35, 39, 44-5, 47, 56-7, 162, 196 exchange, 138 saving-investment, 257 wage-profits, 261, 268

theory,

§92-101,

233-37, 240, 244-7, 249 economic, 152, 154, 157, SZ

137-48, 177,

179,

marginal, 130 Revenue, 100, 102, 141, 189 Revolution (s), 37, 225 Keynesian, 221 marginalist, 259 socialist, 83 Sraffa, 259 Ricardianism, 12, 14, 153

Riches, 34, 60, 64, 67-72, 74, 81 Risk (s), 33, 230, 231, 235, 237-8, 248-9, 258 —bearing, 250 reward for bearing, 238 Rule (s), 10, 38 technological, 19

general theory of, 165 level of, 154, 186 market, 157, 189

132, 145, 162-3,

231-2, 253, 255 increasing, 132

Raw materials, 9, 233 Realism, 34-5

Rent/Rent

269

Research, 2, 25, 26 econometric, 2, 25-6 empirical, 22, 34, 39, 40, 42 historical, 12 Residual, 253 Resource(s), 1, 45, 186, 253-4, 260 fixed, 188 mobile, 188

Sacrifice, 256, 248, 253

Savings, 229-52

239,

286

Studies in Economic Analysis and Policy in Retrospect

cost of, 246 inducement to, 242

natural, 16, 41

social, 18, 24, 26,55

net, 231

Scotland, 97

past, 232 principal source of, 241

Self-interest/-love, 2, 5, 140 Self-regulating economy/system, 196

product of, 234

Share (s), 130, 161

distibutive, 130, 133-4, 257

supply of, 246, 248 will to save, 245

factor, 120 relative, 130, 13-3

‘Saving and investment, 232 equality of, 232 ‘Savings propensity, 257

Scarcity, 36, 161-2, 167, 181, 189-90

Slump, 250 Social engineering, 55

relative, 189 Schedule ‘s) demand, 168

Social reform (s)/reformer (s), 5, 8, 12, 39, 85

technology, 55

investment, 229, 232

Socialists, 9, 11

savings, 229, 232

Soctetyi(ies) 515559 7 Oo ae eon 38 65, 67-8, 70, 82, 104, 142, 231, 258

supply, 168 School

development/progress of, 36, 243

Austrian, 148, 164, 168, 254-5

classical, 2-6, 11-3, 53, 60, 80,

90-7,

107, 137-8, 168, 174, 196, 200-1, 205, 219, 233-4, 246, 253, 259-60, 265

German Historical, 12 Laussane, 35, 164, 178 marginal utility, 167 modern, 92, 98, 105, 110, 178-9 neo-classical, 164

professional, 43-4

study of, 28

Sociology, 1, 12, Solution, 11, 40, 42 theoretical, 13

Speculation, 6 abstract,

10

Specialisation, 20, 225, 260

systematic, 20 typical, 20

theoretical, 39

Standard of living, 207-9

Science (Ss), vill abstract, 17

comfortable, 207

wretched, 207

deductive, 18 descriptive, 8, 47 : economic, 4, 27-8, 35-6, 45 empirical, 19, 33-4, 45, 54, 85 moral, 4

natural, 7, 16, 19, observational, 8 physical, 18-9, 20, positive, 3, 9, 10, positivistic, 35 social, 16-9, 24-6, tool-making, 32 tool-using, 32

inner-, 225 overthrow of, 5

20, 24, 26-7 22-5, 45 12, 22 35, 40

Scientific character, 2-4, 11-2 Scientist (s) economic, 27

State, 1, 5, 52, 63, 86 future, 28 inefficient, 86 present, 28

:

progressive, 63 role of, 75

specific/unique, 28 Statesman/statesmen, 1-2, 10-2, 45, 56 Static/stationary state, 134, 236, 243, 207, 216, 250, 256, 259, 263 Statistics, 41 economic, 38 Statistical progress, 24, 37, 39

Students, 225 Study, 12

dndex

287

empirical, 42

Tendency (ies), 2-3, 13, 33, 36, 84, 248

statistical, 42

counteracting, 3

Subjectivism, 266 Subsistence,

61, 63, 66, 69, 75, 163,

194, 198, 236, 240 level of, 197, 203

of profit to fall, 249-50 of rate of interest to fall, 235, 237, 242-3, 245, 249

physical, 201

science of, 8 statement of, 2 Theorist, 28

theory, 194, 203

Theory(ies), viii, 12, 22, 32, 45

means of, 66, 75, 84, 198

Substitutability, 255 Substitution, 116, 177 effect, 123, 157 elasticity, 113, 116, 123, 130 law of, 115 marginal rate of, 124 product, 12 rate of, 123 Supply, 9, 260

decision, 28 deductive, 20, 27, 41-2 distribution, 158, 213, 219, 239 economic, 2-3, 12-3, 37, 39, 40, 42, 45, 64, 187 high-powered, 5, 21 low-powered, 21 normative, 22

;

pure, 33

self-dependence, 82

elasticity of, 129, 268 factor, 138

fixed, 155-6, 134 limitation of, 180 price, 170, 179, 183 Surplus, 154, 161-4, 177-86,

230,

235,

253, 261

Switching, 269 re-, 233, 260 System,

social, 22 Therapeutics, 37 Thovght classical, 100, 137, 232 Thrift/thriftiness, 231, 232, 246 Time, 2, 10, 12, 21, 236, 246 Time-factor, 168

Time-horizon, 266

Time-impatience, 255 Time-lag, 208 Time-period, 130, 148, 208 Time-preference, 255 Toil and trouble, 253

closed, 57 economic, 42

filing, 48 self-regulating, 36 Walrasian, 22

Taste (s), 255, 260 Taxation, 43, 101 effects of, 38 incidenee of 38

Trade union, 220-1! Trap, 225 Trends formalist, 35-7 Marxist, 35-7 teleological, 35-7 Triad, 92, 102, 104-8, 11, 144

Technical change/progress, 230,.253

Truth, 2, 8, 11, 19, 245

Tariff, 38

dis-embodied, 130 neutral, 129 Ulysses, 68 Uncertainty, 127, 231, 233, 258, 269

Technicians, 37, 41, 225 Techniques, 16, 41, 134, 256, 268 Technology, 114, 133, 137, 154,

186-7, 200, 231, 253-4, 260, 269 Technological disturbance, 230 progress, 187

156,

Unemployed/unemployabie, 266, 225, Unemployment, 61, 65-6, 80, 206, 225,

245 chronic, 231 seasonal, 206

288

Studies in Economic Analysis and Policy in Retrospect

Uniformity (ies), 8, 17, 21,24,

34, 42,

Unit, 78-9, 182, 184 Usury, 234

Utilitarians/Utilitarianism,

1, 4, 5, 8,

76, 86, 87 individualistic, 5 materialistic, 4

Utility, 5, 10, 21, 34, 269

drift, 225 dynamic, 250 effect on, 244-5

49, 50

139,

144, 266,

marginal, 210, 260 Utopian, 55 U-turn, 265

market/short-run/term, 146

139, 143-4,

market, 204, 206 money, 267 natural, 204, 206 real, 254, 249, 265 stable, 77

structure, 227 subsistence, 63-4, 213

196, 199, 206-8,

Wage-interest frontier, 134, 258

measurement of, 253 natural/long-run/term, 145, 190 normal, 138-9, 144-5, 148, 190 real, 189 standard of, 253 subjective, 41

Wage rate-rate of profits trade-off, 134, 258 Wage theory, 210, 220 classical, 194, 204

general, 210-1 pre-Keynesian, 221

Valuation, 21-2, 26, 28, 154, 159 general theory of, 152-4,

iron law of, 217-8 living, 61 low/lower, 72, 79, 241, 245, 249 management/superintendence, 233-4,

236, 238, 249-50

Value, 6, 8, 9, 40-1, 44, 52-3, 75, 93, 95, 102, 137-8, 140-143, 147-9, 168, 181, 194, 238 conceptual, 41 crit'cal, 40

fund, 195-7, 199-200, 204, 206-7, 212, 230-1, 243, 246, 263 high) higher, 64, 69, 74, 77, 81, 197, 223, 241, 245, 249

167,

177,

186, 194, 221 Variable (s), 3, 8, 22-4, 26, 33,49 economic, 45 exogenous, 269 strategic, 37 untuly, 33 View (s) metaphysical, 253

subjectivist, 253

Wage (s), 6-7, 9, 38, 61, 63-4, 68-9, 76-7, 92-3, 95-6, 99, 101, 132, 134 137-8, 140-2, 149, 194-6, 233, 235, 238, 243-7

Waiting, 231, 232 Wealth, 6-8, 61, 63, 72, 74, 77, 95, 100-1, 106, 138, 141-2, 149-50, 187, 201, 206 production, 6-8, 78-9

Welfare/ well-being, 10, 35-6, 40, 53, 55, classical concept of, 53

economic, 34, 41, 52-4, 87 economics, 36, 52-3 function, 52 maximisation of 35, 52 modern concept of, 42, 52

social, 34 Widow’s cruse, 2, 68 Worker marginal, 216, 220