History Of Political Economy Research Paper

1. The Derivation And Evolution Of The Term ‘Economy’

Although the discourse of political economy first emerged in early modern Europe, the term derives from Aristotelian beliefs concerning social and political order. Aristotle’s Politics outlined two forms of human association: the oikos and the polis. The first, the household, was instituted for the satisfaction of private daily needs; the second, the domain of political association, structured public life. Aristotle introduced this distinction in response to Plato’s argument that the art and technique of government was everywhere the same; much of Politics is therefore taken up with the different ways in which public life could be structured. By contrast, only one form of organization was foreseen for the household, whose head ruled over its members like a monarch over its subjects, securing the proper employment and maintenance of property and persons. Elsewhere in his Nicomachean Ethics Aristotle had argued that the virtuous man set no store by wealth, hence it could be no part of virtue to deliberately increase the wealth of a household. The purpose of the household was therefore the provision of an ordered material existence to its members through the allocations made by the household head. Beyond the household, in the public domain, merchants engaged in trade and money-getting, but this was activity governed by no definite conceptions of virtue or order, subordinated to the superior principles of government.

Vestiges of this way of conceiving social and political relations persisted into the eighteenth century, especially in English, French and German treatises which adumbrated the proper management of farm and field. However, in the early seventeenth century ‘economie politique’ adopted the central householding tenet of the Aristotelian model outlined above, projecting it into the public domain, hence creating a new ‘political oeconomy’—which sought to identify the most expedient manner in which the interest of ruler and ruled might be reconciled within a state conceived as a giant household. Although this naturally involved proposals for the augmentation of population and the means of their subsistence, the pursuit of wealth for its own ends had no definite place in this new order. In France, commerce was the term assigned to activity related to trade, finance, and money; literature related to this aspect of economic activity developed quite separately to that of a political oeconomy primarily focused on agricultural, subsistence activities.

2. The Sources Of Power And Plenty

In the context of a European economy recovering from the ravages of the Thirty Years War, vulnerable to epidemics on the one hand and periodic poor harvests on the other, the priority given to agriculture as the foundation for any increase in numbers and welfare requires little elaboration. Overseas trade could make a small country like Holland rich, but both Britain and France were simply too large for trade to have such an impact. When in the early nineteenth century David Ricardo outlined the benefits of international trade he chose as his examples English wool against Portuguese wine—products that both countries had in abundance, of course, but where the increase in welfare consequent upon exchange had little impact upon the central issue of subsistence. And in fact the overseas trade of Britain throughout the eighteenth century facilitated the import of sugar, tea, coffee and spices, luxury goods whose significance in turn became part of a debate on the implications of the production and consumption of such goods. Not until the end of the century did grain imports exceed exports, and this reflected both an increasing population and a shift in the structure of production that formed the origins of the industrial revolution. This new pattern of international trade—in which domestic employment and a rising population increasingly depends on the export of manufactured goods in return for which food and raw materials are imported—first emerged in the nineteenth century.

States with ready access to the sea—Spain, France, Britain, and the Hanseatic cities— had the opportunity to develop overseas trade and fisheries, and an associated literature developed which both urged the extension of trade as the path to wealth, and outlined the practicalities of successful trade and commerce. Where access to the long-distance trade that the oceans offered was limited, arguments that herein lay the route to wealth and power had little force. Moreover, the profitability of merchant ventures seemed to depend upon risk and chance, not upon the wise investment of capital, the proper management of resources, and the judicious use of labor that typified a flourishing agriculture. The rhythm and progress of production in this sphere of economic activity lent itself to the conceptual framework of political oeconomy and could without serious modification be extended to manufacturing activities. German texts of the eighteenth century routinely countered Landwirtschaft to Stadtwirtschaft, the town economy to the country economy, signifying manufacture in the former and agriculture in the latter—even though much early manufacturing actually took place in rural locations. But the contrast set up in this manner simply excludes serious consideration of trade and finance as significant elements in the welfare of the state.

3. The Enlightenment Science Of Political Economy

In the mid-eighteenth century a ‘new science of political economy’ was created, based upon a conception of the ‘natural order’ of society in which agricultural activity was the unique source of a ‘net product.’ The systematic analysis of production and circulation that was developed by the so-called ‘Physiocrats’ between 1760 and 1780 owed much to contemporary enlightenment rationalism, but it was also prompted by the growing problems of the French economy, and the increasingly parlous nature of the state finances.

Physiocratic political economy identified the natural foundations of economic activity, and at the same time implied that proper management of the economy required that the ruler not ‘govern too much,’ that excessive interference would impede the formation of wealth. The source of wealth was agriculture, whose net product circulated through the various classes of society; the greater this net product, the stronger the circulation and hence the greater the wealth. Improvements required investment, which could only take place if the net produce was not in the course of its circulation diverted into unproductive ends, such as the production of luxury goods for landed proprietors. Special taxes and duties were impediments to the free circulation of goods; and since all taxes were ultimately funded by the net product, all state revenue should be drawn directly from the sole source of this net product, agriculture.

Quesnay illustrated his ideas with a circulatory diagram, the Tableau Economique (1758–9), depicting the flow of net product from its agricultural source, through the hands of the landlords, thence to the ‘sterile class’ of manufacturers, and then, through the agricultural purchases this last group made, back again to the source. This clear diagrammatic representation of three economic classes and the flows of goods and payments between them is now seen as the original conceptualization of circular flow in an economy, but the originality of this drew little contemporary attention. Criticism of the Physiocratic system isolated two central tenets: the proposition that non agricultural employment was unproductive, and that a single tax upon agriculture was viable, practically or intellectually. The most prominent criticism of this system can be found in Smith’s Wealth of Nations.

4. The Smithian Critique Of The ‘Mercantile’ And ‘Agricultural’ Schools

In Book IV of Wealth of Nations Adam Smith arranged his intellectual forbears into two (fatally flawed) schools of thought. The first of these was the ‘commercial, or mercantile system,’ which, he argued, sought to enrich one state by impoverishing others, imposing duties and a range of restraints of trade designed to attract money and gold into the land. In part a rhetorical exaggeration designed to highlight his own ‘system of natural liberty,’ and in part a willful misreading of an extensive and varied literature more sophisticated than he would allow, his remarks laid the foundations for a critique of ‘mercantilist’ policy that has survived up to the present day.

The other school to which Smith addressed critical remarks was the ‘agricultural’ school. He rejected the idea that agricultural labor was the sole source of wealth, and that other labor was unproductive; but he warmly supported the Physiocratic representation of the annual flow of goods as the source of wealth, and the proposal that this flow should be as little impeded as possible. These were indeed central principles of Smith’s own work, together with a redefinition of what counted as ‘productive’ as against ‘unproductive’ labor.

Smith defined the ‘wealth’ of a nation not as an accumulation of gold, nor as simple populousness, but as the annual produce of its (productive) labor. Productive labor was that embodied in capital; it left a physical trace, unlike a service (no matter how useful or vital to the state that service might be). This could be augmented through the extension of the division of labor; labor could be made more productive by subdividing tasks and rationalizing the production process. There were two provisos attached to this: the first was that this process of the increasing division of labor had greater potential in manufacturing than in agriculture; and the second was that the degree to which it could develop was limited by the extent of the market. From this it follows that the most rapid increase of national wealth would result from the augmentation and rationalization of labor applied to manufacturing, within an economy which was both internally and externally freed from impediments to trade.

Smith was writing in the context of an economy whose structure and rhythms were dominated by agricultural production. This was not only the major economic sector; it was the immediate source of food and was prone to annual fluctuations in output and associated variations in prices. Since foodstuff represented such a major part of expenditures on the part of a majority of the population, the achievement of a low and stable price for grain was a crucial political problem throughout the eighteenth century for European governments.

Broadly speaking, there were two opposed solutions to this question. The first option was to encourage home production of grain by protecting domestic producers: high tariffs on imported grain would prevent the flooding of the market with cheap food in good years, undermining home production which would then be unable to provide adequate supplies whenever the sources of foreign grain diminished, or even dried up altogether. This option therefore secured whatever the level of home produce might be to domestic consumers, albeit at a high price. The second option also encouraged home production, but did so by permitting free import and export of grain. According to this, the availability of a market greater in extent than that offered by the national economy would stimulate domestic producers, consequently rationalizing their activities so that cheap foreign grain would not appear to be such a constant threat to domestic production. This second option proposed that the domestic population would be best served by a supply of cheap food based not upon the protection and control of the home market, but rather upon their access to an international market in foodstuffs. Smith’s argument that the division of labor was a powerful engine of economic growth, and that it was limited only by the extent of the market, was therefore an argument for the benefits of free trade in all goods, augmenting the welfare of all states through the extension of the international economy.

5. The Principles Of Classical Political Economy

Malthus’ An Essay on the Principle of Population (1798) was conceived as a critique of contemporary conceptions of human betterment, and it certainly played a part in discrediting the conventional association of large populations with economic wealth and national progress. But his demographic arguments presupposed a closed agricultural economy, enjoying none of the benefits of commerce outlined by Smith. Some five years before the publication of the first edition of the Essay Britain had, however, become a net importer of grain. Henceforth, exported manufactures would pay for the imports of food required to subsist a large, increasingly manufacturing, population. Expanding (free) trade and commerce was to provide the solution for the ‘Malthusian problem.’

Nonetheless, during the first two decades of the nineteenth century the elaboration of the classical theories of production and distribution presupposed the conditions of an agricultural economy, producing a staple crop through the joint contribution of laborers, farmers and landowners. These three economic classes received wages, profits and rent, respectively, and the question which political economists sought to resolve was the relation between price formation and the distributive shares received by each class. Smith had assumed that prices were simply the sum of distributive shares; political economists sought a systematic explanation of the level of each of the elements within a framework that supposed that human labor was the sole creator of value.

Debate over Britain’s Corn Laws during 1814–5 provided the occasion for the systematic linkage of the pattern of domestic income distribution to the trade regime. Malthus composed three pamphlets during this period which argued the benefits of limited protection, and suggested that rising rents were a reflection of human progress, since he regarded rent as a payment made subsequent to the settlement of wages and profits. Ricardo in his own pamphlet, known as the Essay on Profits, dissented from Malthus’ protectionist sentiment and assumption that rising rents were part of the progress of wealth. Since he assumed that wages were fixed, he argued that there was an inverse relationship between rent and profits. High rents, therefore, meant low profits, they furthermore meant high prices for grain and hence increased the wages that manufacturers must pay their own workers. Since he also assumed that the rate of agricultural profit determined the rate of profit in general, protection for the landlord and high rents depressed the rate of profit in the economy as a whole. The solution to this prospect, he argued, was free trade in grain, which would force agricultural rationalization and lower the average price of grain, the basic foodstuff for the majority of the population. Ricardo’s Principles of Political Economy and Taxation (1817) elaborated these points, and established a core of theoretical propositions that survived until late in the century, John Stuart Mill’s Principles of Political Economy (1848) providing a lasting synthesis of classical principles in a manner that made the science accessible to an informed public readership.

6. The Diffusion Of Political Economy

Smith’s Wealth of Nations was by 1800 acknowledged everywhere as the canonical text of political economy, but nineteenth century English writing had relatively little impact outside English-language areas, and at this time anything written in French had a far bigger readership than texts written in English. Jean Baptiste Say had been greatly influenced by his reading of Smith, and in 1803 he produced his own Traite d’Economie Politique, followed by a number of new editions, a ‘catechism’ in 1815 and a new six-volume ‘complete course of political economy’ in 1828–9. Say conceived political economy as a significant part of an education for republican citizenship, and his writing was deliberately directed to a large popular audience. Since his texts were readable and in French they were quickly taken up outside France, with the result that, after Smith, Say became the most widely recognized political economist of the first half of the nineteenth century.

Say is remembered today for his ‘law,’ that ‘supply creates its own demand.’ In fact, this is a travesty of his argument on ‘effective demand,’ that whatever the general demand for a good, the political economist was only concerned with the demand of those with means to purchase, which means had themselves been gained from previous sales of their goods or services to others. He also argued that the process of production and distribution involved utilities, not goods, and that what the process of consumption destroyed was the utility of a good or service, and not the good or service itself. When combined with his principle of effective demand, this shifted the emphasis of his work away from the (production-oriented) English Classical Political Economy and towards the sphere of consumption. In these and other respects Say’s political economy laid the path which led to the new subjective, marginal economics of the 1870s.

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