Some Forerunners of Classical Political Economy

1.3.1. The premisses of a theoretical revolution

As capitalist accumulation continued, some important changes rendered the mercantilist theoretical position increasingly inadequate in respect to the economic reality.

First, notwithstanding the efforts of the great companies to preserve their monopolistic positions, the diffusion of trade and competition tended to reduce the price differentials among regions and nations, causing a reduction in commercial profit margins. Second, the fall in profits led to an increase in capitalist control over the production process. On the other hand, in many of the old guilds, the master craftsmen had already begun to transform them­selves from simple workers, who operated with the help of paid apprentices, into organizers and controllers of the production process. In this way a capitalist class was born which did not originate from commerce, and whose interests were in conflict with those of the merchant manufacturers.

These changes were accompanied by a radical, even if at first gradual and confused, rethinking of the traditional way of conceiving economic facts. On the one hand, paternalistic State intervention in the economy began to be seen with suspicion. On the other, the idea made ground that prices and profits reflected the conditions of production rather than the forces of demand. In particular, the idea that the origin of profit was to be found in the production sphere began to spread. The new class of capitalist entrepreneurs needed to free itself, not only from the old economic and administrative obstacles, but also from traditional moral and ideological ties. The new philosophy of individualism, together with developments in the Protestant ethic, contrib­uted to solving the problem by liberating egoistical and acquisitive behaviour from religious condemnation and created the premisses for a new type of legitimation for economic activity.

Towards the end of the seventeenth century and the beginning of the eighteenth, the idea that administrative restrictions on economic activity created more disadvantages than advantages for the collectivity began to spread among the economists. On the other hand, if it were true (as it was beginning to be asserted without shame), that self-interest and acquisitive behaviour produced wealth for the collectivity as well as for individuals, then the State would have to reduce its own sphere of action to the recognition and the protection of property rights, and the connected function of enforcing contractual agreements.

For the history of economic thought, the dates that delimit this period could be fixed at 1690, the year in which Petty published Political arithmetik, and 1755, the years of publication of Cantillon’s Essai. In this period a certain number of economists, even if still under the influence of mercantilism, began to distance themselves from it in different respects and to lay the foundations for that revolution in thought from which, in the second half of the eighteenth century, was to emerge classical political economy. The most important of these forerunners were William Petty, John Locke, Dudley North, Bernard de Mandeville, Pierre le Pesant de Boisguillebert, and Richard Cantillon. We have not the space here to give an exhaustive account of their ideas; so we will limit ourselves to mentioning only the most innovative of their arguments, especially those which seem to anticipate future theoretical developments, while leaving out the components of their thought which were most influenced by mercantilism. We will not consider, for example, their theories on the subject of money, which, especially in Locke and Cantillon, consisted of a resumption of the traditional quantity theory.

1.3.2. William Petty and ‘political arithmetick’

These economists were well aware of the methodological problems raised by the attempt to make economic thought a real science; and they were strongly influenced by the debate on method which had gripped seventeenth­century philosophical thought.

In particular, Petty was influenced by Bacon’s thought and fascinated with experimental science. Although he realized that scientific experimentation was impossible in the social sciences, Petty aspired toward an empiricist base for economics. He believed, for example, that pure speculative reasoning must be avoided. The method suggested in Political arithmetick was to appeal only to empirical facts. Qualitative arguments, based on ‘comparative and superlative words’, must be replaced by more rigorous ones, relying on ‘number, weight and measure’. This is a method based on induction from quantitative data. Here is the derivation of the name ‘political arithmetik’ that Petty intended to give to the new science—a science which, in the work of Petty himself and his followers, often became confused with statistics, national accounting, and demography. In economics, this methodological position has never prevailed, except perhaps in statistical economic research, which has always accompanied but never conditioned the evolution of economic thought, and, more recently, in the foundation of econometrics, or at least in a certain way of justifying it epistemologically.

The method which did prevail was that proposed by North in Discourse upon Trade (1691). A method based, with explicit reference to Cartesian philosophy, on deduction rather than induction. North believed that eco­nomics should be founded on self-evident truths. Starting from indisputable principles, it would be possible, simply by means of the rigorous use of logic, to deduce conclusions that would be as clear and evident as the premisses. North’s work is an early example of that habit, which has become almost a vice for a great deal of contemporary economic theory, of only analysing simple and well-defined problems so as to allow the scholar to find clear ‘truths’ without getting too mixed up in the facts.

Petty made an important innovation concerning the explanation of value. On the one hand, he completely abandoned the subjective theory of value; on the other, he introduced the concept of ‘natural value’.

The search for a unit of measure to translate the value of land into labour is interesting, because in the process Petty managed to define the natural price of labour. In fact, that unit of measurement consisted of the average daily amount of food necessary to sustain a worker. The wage goods used in this calculation must be those produced in the best conditions. Here we have the embryo of the classical-Marxian theory of subsistence wages and the theory of socially necessary labour. But Petty did not explain how and why wages tended to adjust to the subsistence level. Instead, he gave only the usual mercantilist justification of why wages must be fixed at this level: because the labour supply would vary inversely to its price, if its price were above the subsistence level.

Petty also anticipated the classical economists on three other important questions. First, he was perceptive both in regard to the importance of the role played by the division of labour in the capital accumulation process and in regard to the relationship existing between the division of labour and market size. Second, he sketched out an idea of surplus. This was calculated by subtracting from the value of the product obtained from a given piece of land both the yield which would have been obtained from it without the applica­tion of labour and the wages paid to the employed workers. The surplus defined in this way was interpreted as a product of labour, as it was obtained only by the application of human energy. However, it turned out to be rent! Another anticipation of the classical theories concerned rent itself, the formation of which was explained in terms of differential returns. The origin of these, however, was to be found in the different distance of the pieces of land from the market, rather than in the various levels of fertility of the soil.

Finally, it is necessary to mention Petty’s important contributions on the subject of public finance, where he anticipated several of the arguments of the later classical and free-trade theories. For example, A Treatise of Taxes and Contributions (1662) contains more than an embryo of the theory of some canons of taxation: clarity and certainty, economy in collection, ease in payment, and proportionality. Petty justified the last criterion by the necessity of avoiding the use of taxation to modify the distribution of income.

John Graunt, Charles D’Avenant, William Fleetwood, and Gregory King were all followers of Petty. They almost formed a school of thought and also contributed to the acceptance, at least in England, of Petty’s use of quant­itative methods. Their applied research was extremely interesting, and at least one important result is worth mentioning here: ‘King’s Law’, according to which the percentage changes in the price of corn are a decreasing function of the percentage changes in the size of the harvests.

1.3.3. Locke, North, and Mandeville

Two other scholars, John Locke and Dudley North, without being Petty’s direct followers, were certainly influenced by him. One of the most important of Locke’s contributions in the field of economics was his attempt to justify private property by making use of the labour theory of value. It is important because it contains, in a nutshell, all the ideological overload that the labour theory of value had to endure in its subsequent evolution. Locke’s basic idea was that individual liberty implied the right to control one’s own labour. This would lead to the right to own the product of one's own labour; moreover, as land becomes productive and acquires value only with the application of labour, the private ownership of land would also be justified. It is a justification of private property derived from natural-law philosophy. The right to control one’s own labour was considered a natural right, independent of the institutional structure of the society. This also held true for the ownership of land. As, in nature, men are basically equal or, rather, their natural gifts of working ability are not fundamentally unevenly dis­tributed, then neither the ownership of wealth, in general, nor that of land, in particular, should be unequally distributed. Locke considered this to be true in primitive societies and in general in economies in which land was not scarce, but not, however, in the England of his times.

The reason for the inequality which really existed in modern economies was to be found in the ability of money to preserve value. Money on the one hand fuels the thirst for wealth and, on the other, allows an indefinite accumulation of wealth. Therefore it would lead to an unequal distribution of land if this is scarce. But money derives its value from social conventions, and is capable of preserving value as long as people are willing to accept it as a means of payment. Thus it is the society that legitimizes an economic situation in which wealth is distributed unequally. Locke did not believe that an unequal distribution of wealth makes private property any less legitimate. It was left to the socialists of the nineteenth century, especially those of the English tradition, to bring to light all the political and social implications of this explosive mixture of value theory and natural-law philosophy. At the end of the seventeenth century it served only to give a philosophical basis to the formation of English liberalism, though not of free-trade doctrines. Locke believed that the interests of the nation were different from the sum of private interests, with all the consequences that this entailed for economic policy; especially trade policy, on which his thought did not diverge greatly from the traditional mercantilist position.

The decisive step in the direction of free trade was made by North and Mandeville. These two scholars had a disenchanted view of human nature. ‘The public is a beast’—North stated in his Discourse. Thus, he refused to base politics and economics on any elevated moral philosophy. Instead, the starting point, according to North, was the exorbitant appetites of indi­viduals. Here is one of the first manifestations of methodological and ontological individualism in economics. The ‘public’ is nothing more than the sum of private citizens; and the science dealing with wealth and public welfare must begin with the appetites which individuals try to satisfy. Harmony of interests is derived solely from the fact that nobody is able to look after the interests of an individual better than the individual himself, so that if the individuals are left free, they will prosper. On the other hand, any measure that interferes with the individual’s attempts to pursue private goals hinders the achievements of the public interest. This idea had drastic con­sequences for economic policy: if collective interest depends on private interest and the individuals are the best judges of their own interests, then the State should acknowledge this. The best policy is no policy, no laws to regulate trade, none to regulate the interest rate, nor to control the money supply.

There were also two interesting contributions to monetary theory. First, North reaffirmed the theory already proposed by Petty and Locke, according to which the ‘just’ level for the rate of interest is simply that to which the forces of the supply and demand for money ‘naturally’ lead it. In this way, all the ‘usury’ problems that had contaminated mercantilist theory for so long were simply swept away. In regard to the rate of interest, the monetary authorities had nothing to do but stand back and watch. Second, there is a theory of the money supply which, again, takes some of the mer­cantilist arguments to their extreme consequences; a theory according to which the money supply can never be inadequate for the needs of trade. The adjustment occurs through a process of hoarding (or melting down coins) when the supply exceeds the demand and dis-hoarding (or reconverting the bullion into coins) in the opposite case. North was also against sumptuary laws which, according to him, only hindered the individual in the pursuit of his own objectives and thus discouraged any private initiative.

Mandeville was of a similar opinion. In The Fable of the Bees, or Private Vices, Public Benefits (1714), he not only insisted that the public welfare is fostered by leaving the individual completely free to satisfy his own ‘vices’—for example, by giving vent to economic greed—but also considered some of the most acclaimed economic and social virtues, such as savings, as socially less useful than their opposites. Ostentatious spending, for example, created more jobs than parsimony—an argument for which Mandeville was fairly esteemed by Keynes.

1.3.4. Boisguillebert and Cantillon

On the Continent, unlike in England, the reactions against mercantilism at the end of the seventeenth and at the beginning of the eighteenth centuries assumed the form of ‘agrarian protectionism’. Scholars such as Sebastien de Vauban, Pierre le Pesant de Boisguillebert and Richard Cantillon endeav­oured to demonstrate that the State should encourage agriculture rather than protecting trade and industry. The argument they adopted was that the real wealth of a nation was made up of consumer goods, not of accumulated capital and gold, and that therefore it is the result of agricultural production and not of trade, nor of the production of ‘artificial wealth’.

Boisguillebert maintained, in Dissertation sur la nature des richesses, de l'argent, et des tributs (1712), that, if agricultural production was to be promoted, farmers should be allowed to receive sufficient earnings, and this meant that prices should conform to the ‘natural law’. So, the best way to guarantee normal prices and earnings was to laisser faire la nature et la liberte. These arguments led Boisguillebert to propose economic policy measures similar to those which had already been put forward by Vauban, and which amounted to a simplification of the tax system and a liberalization at least of internal trade. In particular Boisguillebert put forward the view that consumption, especially that of landowners, was the driving force of economic growth, as it created the aggregate demand for the whole economy. Therefore it was necessary to abolish the taxes which discourage consump­tion, and to impose an income tax. We are already moving along the line of thought which was to lead the physiocrats to propose the impot unique. It is also important to remember that Boisguillebert maintained that all incomes originated, directly or indirectly, from agricultural production.

The laissez-faire argument made it necessary to demonstrate the natural tendency of the economy towards equilibrium. Boisguillebert sketched out such a demonstration in various parts of his works, anticipating both Quesnay’s tableau economique and Say’s Law; and even though it was little more than a set of intuitions, it was enough to initiate a French tradition in the theory of equilibrium.

One common characteristic of the Continental economists during this period was that, unlike most of their English colleagues, they felt no need to offer an ethical justification of private property. The ability of individuals to pursue their own interests, if they are allowed to do so, is a sufficient justi­fication for laissez-faire, they maintained—to the extent that they had no hesitation in recognizing the tyrannical and violent origin of private property. This was clear in the work of Boisguillebert.

The same argument was also put forward by Cantillon. Of Irish origin, Cantillon worked for a long time as a banker in France and often travelled between Paris and London. This placed him in a strategic position, enabling him to absorb the best of contemporary English and French economic thought. Cantillon took up Petty’s theory of value, which he reformulated by trying to base it on the reduction of the cost of production to the inputs of labour and land. He was clearer than Petty in regard to the distinction between ‘intrinsic value’, which depends on production conditions, and ‘market price’, which depends on the forces of supply and demand. His explanation of the adjustment of the latter to the former was extremely clear and modern: an explanation based on the hypothesis that the market price is fixed by the seller and dynamically modified on the basis of his estimate of the demand.

Cantillon also inherited from Petty the useless search for ‘parity’ between land and labour, as well as the related theory of the subsistence wage as determined by the production conditions of the wage goods. Cantillon also sketched out an explanation for the convergence of real wages towards the subsistence level which could well be defined as pre-Malthusian: the con­vergence of the two types of wage would go hand in hand with the conver­gence of the working population towards the demand for labour. Besides this, Cantillon also offered an explanation of wage differentials which anticipated Smith’s: they depend on the differences in the cost of training workers, on the differences in risk in different types of job, and on the different levels of loyalty and responsibility required by the jobs.

Cantillon also absorbed from Petty the passion for empirical research, but unfortunately we do not know the results he obtained in this field, as the statistical appendix of his work was lost. Also, his monetary theory was of English origin and clearly quantitative in nature, but moderated by an argument according to which the value of money tends to adjust itself to the production cost of gold. He described in an original way the process by which an increase in the money supply generates inflationary impulses that spread out gradually, through induced demand, in the diverse sectors and income groups. In this way, the ultimate effects of an increase in liquidity would vary according to the type of money inflow. This phenomenon has become known as the ‘Cantillon effect’.

On the French side, Cantillon was strongly influenced by the agrarian protectionists and especially by Boisguillebert. The French influence was shown in his preference for land rather than labour—so much so that, where Petty had tried to reduce land to labour in order to measure value, Cantillon tended to do the opposite. He developed Boisguillebert’s argument according to which rent, being an income without being a cost of production, would constitute a source of expenditure autonomous with respect to productive

activity; therefore it would influence the levels of output simply as a consequence of the moods, fashions, and tastes of the aristocracy. This idea, linked to the one, derived from Petty, according to which rent is the unique component of net product, seems to justify all those who consider Cantillon a forerunner of the physiocrats.

This is not all, however. Cantillon also inherited Boisguilleberfs sketch of the tableau economique, and integrated it into a modern theory of the three social classes (landowners, tenant-farmers, and workers) and of the trois rentes (rent, profit, and farmer’s expenditure), which allowed him to formulate a theory of the circular flow.