Neo-classical thought is characterised by the abandonment of the labour theory of value and the surplus exploitative interpretation. These are replaced in neo-classical thought by a utility theory of value and an admission of the productivity of capital. A French, German and English school can be identified.
FRENCH NEO-CLASSICAL SCHOOL
Condillac
Condillac is a forerunner of the modern subjective school. Le Commerce et le Gouvernement consideres relativement l'un a l'autre 1776 is an early statement of utility theory. The source of value is utility, utility being the significance that an individual attaches to a good for the purpose of satisfying a want. Utility is therefore related to want. Condillac did not discover the marginal effects that make utility a meaningful economic explanation of value but says that utility and scarcity are the key components of value. He holds that exchange occurs where parties to the exchange differ in their views as to the utility derived from the products involved in the exchange. Thus value is increased through exchange (this view was opposed by the Physiocrats who hold that any gain in exchange arises through cheating of the counterparty). Condillac holds that any activity (agriculture, industry, commerce) that creates extra utility is a source of value, thus the Physiocrats' view of agriculture as the only source of value is contradicted by Condillac.
Jean Baptiste Say
1767 - 1832. Traite d'Economie politique 1803. Repeats Smith's ideas but gives theory of the market that general overproduction is impossible since every supply creates a demand and every demand creates a supply (Say's Law). If over-supply exists in one product then this is because under-supply exists in another product. Thus shortfall of exchange in one product covers excess of exchange value on another product. Say also gives an early theory of utility as the determinant of value. He proposes a radical application of the utility theory of value, and is the first economist to fully abandon the labour theory of value and stress the positive approach in economics. Value in exchange is an expression of subjective estimates of utility. Cost of production influences price through changes in supply of a good and forms the lower bound of value above which utility is the determinant. He rejects Smith's distinction between productive and unproductive labour, but ignores Smith's and Physiocrats' distinction between labour that produces a surplus and labour that does not produce a surplus. Thus productivity of labour depends on utility of goods produced not the nature of the inputs to those goods. Thus all activities that create a utility are productive. Production is thus a result of co-operation between all factors of production (labour, capital, natural resources) and all factors share in the revenue produced. Thus the idea of the surplus is abandoned. Entrepreneurs are very important because they provide the link between the market and the factors of production. Say's method emphasises the necessity of basing economic theory on correct premises. Making deductions from incomplete premises was Ricardo's mistake. Thus a positive approach to economics is required according to Say.
Cournot
1801-1877. Carries on Say's line of thought but uses mathematical equations to describe supply and demand and their effect upon exchange value under competition, monopoly and duopoly. Argues that although many economists see economics as being unsuited to mathematical description, mathematical symbols can be used to describe relationships and magnitudes if not specific quantities or specific relationships. Thus Cournot's work has a heavy reliance on calculus.
GERMAN NEO-CLASSICAL SCHOOL ...
Soden
Die Nationalokonomie 1804. Positive value is the ability of a good to satisfy a want. Comparative value is the exchange value of a good. Positive value and other factors such as scarcity determine comparative value.
Lotz
Handbuch der Staatswirtschaftslehre 1820. Accepts Soden's distinction between positive and comparative value, but makes comparative value a function of two positive values - the ability of a good to satisfy a want and the scarcity of that good. Distinguishes positive value and price, price being largely determined by the costs of production, value being largely determined by human desires.
Johann von Thunen
Der Isolierte Staat (part 1 1826, Part 2 1850). Agricultural economist, highly theoretical and mathematical, similar to Cournot, but less calculus and more numerical examples. Says nothing about value, but uses marginal analysis and accepts productivity of capital. In Part 1 he devises a theoretical town in a large fertile plain, with no waterways, surrounded by wilderness. He asks how cultivation will locate itself and proposes that perishables will be grown near the town, other goods according to bulk transport cost and perishability will be grown in concentric circles around the town. The price of milk would be such that no other product could be produced on that land at greater profit; thus he establishes the opportunity cost principle. Transport cost at distant points eventually eats up all profit, thus cultivation ends at some far point from the town. Thus a marginal analysis appears. This analysis also explains differences in rent given different costs of production, not very differently from Ricardo, but relies on costs of transport and so on, rather than the fertility of land. In Part 2, he anticipates marginal productivity theory in his approach to wages and capital. Here, he says that extra wages and capital increase the yield of agriculture but also increase cost. He examines the margins of production for their yield and cost in order to identify the proportions of labour and capital employed on land. Labourers are employed up to the point at which the value produced by the last labourer equals the wage paid to him. The wage of the last labourer must be same as for other labourers doing the same work. (This same marginal theory applies to capital.) Also, he proposes his idea of the 'natural wage' using differential calculus (and holding this as his most important contribution to economics). Most economists remember him for his early statement of marginal productivity theory.
BRITISH NEO-CLASSICAL SCHOOL
Robert Torrens
An Essay on the Production of Wealth 1821. Discusses weaknesses in Ricardo's labour theory of value. Accumulated labour not current labour determines exchange-value. Thus restates Smith.
James Mill
Elements of Political Economy 1821. Revises labour theory of value by saying that capital is only accumulated labour. Profits are thus a reward for hoarded labour. Capital is productive and thus a determinant of exchange value (but this makes no difference to the labour theory of value since capital is accumulated labour, thus his attempt to resolve the difficulties of the labour theory fails). A topical example at the time was of wine becoming more valuable with the passage of time, contradicting Ricardo's labour theory of value. Mill tries to explain it using his theory that the passage of time is equivalent to the use of capital which is equivalent to use of the hoarded up labour that is capital.
Samuel Bailey
A Critical Dissertation on the Nature, Measure and Causes of Value 1825. Uncovers Ricardo's mistakes and discredits the labour theory of value. Did not replace this discredited theory with one of his own, but prepares ground for later economists. Exchange-value reflects the esteem in which a product is held and has nothing to do with the quality possessed by that product. Esteem is relative. Value is thus nothing more than a relation. Labour theory on the other hand says that value is an absolute, a function of the amount of labour embodied in a product.
Richard Whately
Drummond Chair of Political Economy at Oxford 1830 - 1831, later Archbishop of Dublin. Contributes little to economics in his short encounter with the subject. Introductory Lectures on Political Economy 1831. Man is a creature that indulges in exchange, no other animal does this. He rejects the labour theory of value. His famous quote is "it is not that pearls fetch a high price because men have dived for them, but on the contrary, men dive for them because they fetch a high price".
Mountifort Longfield
Lectures on Political Economy 1834. First holder of the chair of Political Economy at Trinity College Dublin. Utility theorist, fuller anticipation of the marginalist school. Exchange ensures that an individual has that combination of goods that is of the greatest utility to him in proportion to their value. Shares Bailey's relativism, holds that labour is often the best measure of value. Later develops the idea that supply is determined by the cost of production and demand determined by utility. Price equates supply with demand backed by purchasing power (effective demand).
Nassau William Senior
1790 - 1864. Another forerunner of utility analysis as evidenced by his discussion of distribution. Twice Professor of Political Economy at Oxford. Endeavours to reconcile Say and Ricardo on theories of value and distribution. Non-interventionist, against the Factory Act 1837 which aimed to reduce the working day to 10 hours on the grounds that the last two hours of the days work were the capitalists' profit, but he suggested an improvement of housing conditions instead (this burden falls on the landlord and not the industrialist). He works on the Commission on the Condition of Hand-loom Weavers in 1841. This report admits the impotence of government to intervene where competition from other products has resulted in reduction in demand for hand-loom products. He suggests education, anti-trade union laws, abolition of import duties to reduce living costs and restrictions on entry to the trade. Regarding the Poor Law Reform 1834, Senior wanted relief of destitution for able-bodied poor provided that it didn't interfere with the free working of the labour market. In An Outline of the Science of Political Economy 1836, the most complete statement of his theoretical work, he defines wealth as everything that is susceptible to exchange or which possesses value. He focusses attention upon the time factor in justifying interest, in other words the waiting for reward that accompanies the investment of capital. Senior's idea of abstinence as the cause of interest was criticised on the grounds that rich people hardly abstain from satisfying their wants, but their money still earns interest.
Three qualities affecting value are transferability, relative scarcity and utility (the power to give gratification of any kind). Utility depends upon how much of the product an individual has already consumed. The more of one product that is consumed the less the utility of the next unit. Thus scarcity is the most important determinant of exchange value.
Senior's value theory is generally regarded as an extension of the cost-of-production theory into which the post-Ricardians had transformed the labour theory of value. He admits the productivity of capital under the term 'abstinence'. Supply is held to be affected by labour, abstinence and the spontaneous agency of nature that is freely available to all. The cost-of-production is thus the sum of labour and abstinence. Thus wine in the cellar grows in value due to abstinence (tying up of capital) not due to Mill's use of hoarded up labour. But what about instances in which agency of nature is not freely available to all? Senior looks at monopoly and concludes that cost-of-production is a smaller determinant of price here since scarcity, controlled by the monopolist, is the chief determinant.
John Stuart Mill
1806 - 1873. Chief exponent of English social reform movement. Followed Ricardian thought closely. Son of James Mill, brought up to continue the tradition of Ricardian economics as it appeared in his father's Elements, and utilitarian social philosophy of Bentham. But confronts growing socialism and attack upon early classical theorists, thus his approach was symbolic of compromise, uniting economic theory and political thought into a complete system. This he achieved great short-term influence and showed later economists how to derive policy conclusions from theory. Some see Mill as the ultimate statement of classical theories, a summation of half a century's classical thought in a final complete theory. Others see his work as a half-way house in the evolution away from Ricardo's thoughts.
Mill refutes Bentham's self-interest motive. Says Bentham ignores noble motivations to human behaviour, and that self-love, love and hatred for others are useful in the business sphere of economic analysis. He admires the philosophy of Coleridge for his emphasis on education, loyalty and national cohesion, and for criticism of laissez-faire. Thus he criticises Bentham. Mill moves away from doctrinaire laissez-faire but does not entirely abandon it. Government should try to help people to improve their material and moral well-being. Also agrees with Coleridge that landed property is too important an asset to be left in the hands of private owners without state regulation. But he criticises Coleridge for writing like an 'arrant driveller' especially on political economy. Influenced by Comte, the founder of positivism, in which positive science was promoted. Mill was impressed by the early French and English socialist reaction to the early evils of capitalism.
On Liberty 1859 is his most explicit theoretical statement. Interference on the part of an individual or state with the action of others is warranted only for self-protection. Interference to protect an individual from himself, or for his own good, physically or morally is unwarranted. But there are many exceptions to this principle, for example children (hence the government should be empowered to regulate for education) and prostitution (which the government should regulate against), among other things. Here we see the conflict between the demands of utilitarianism and the concept of right and wrong. If individual liberty is sacrosanct, then how can we explain the regulation of trade unions, anti-monopoly and anti-prostitution legislation? Mill compromises on this point by allowing exceptions that he sees fit to the general laissez-faire principle. He says that all the difficulties of Communism are 'as dust' when compared to the problems of the then current capitalist system. But in general he remains faithful to liberal economy with Fabian leanings. Mill had a large working-class following thereby securing his seat in Parliament. He was in favour of competition, universal education, legislation aimed to diffuse wealth and remove inequality of opportunity.
Essays on Some Unsettled Questions in Political Economy 1844, he holds that political economy treats man solely as an entity "occupied solely in acquiring and consuming wealth" and ignores every other passion or motive. Principles of Political Economy with some of their Applications to Social Philosophy 1848 he proposes normative arguments, using ethical considerations of how competition works, how it is limited by tradition, thus formulating a social philosophy as well as an economic theory. The laws of production of wealth are held to be determined by physical truths whilst the laws of distribution are determined by institutions, laws and customs. Thus, Mill argues for legislation to redistribute property and income (here he does not seem to see that distribution and production are closely interlinked and that interference with one impacts upon the other.)
Mill adopted Senior's theory of value, Malthus's theory of population in his theory of production and argues for limitation of population. He accepts the wage-fund doctrine in which average wages are determined by the amount of capital available to pay wages divided by the number in work, thus wages can only change if there is a change in either of these two factors. Thus he argues for limitation of numbers in work, and also argues that attempts by workers to raise their wages were futile because the average wage rate would stay the same (but he abandons this doctrine in later life, motivated perhaps by a desire to show that trade unions' attempts to improve workers pay were not doomed to fail by the existing laws of economics.).
Mill believed that the increase of wealth must eventually come to an end and that society enters a stationery state, a blissful equilibrium in which competitive struggle disappears. |
