The Smithian Orthodoxy

2.3.1. Aneraofoptimism

The forty years between the publication of The Wealth of Nations and that of Ricardo’s Principles was a period of enthusiasm and optimism—both for the English middle class, which was involved in the most intense phase of the Industrial Revolution, and for the Continental middle class, the French in particular, which was endeavouring to realize the Enlightenment dream.

There were also more pessimistic voices, of course. One was that of Thomas Robert Malthus, who, in 1798, in a polemic against Godwin’s optimism, published the Essay on the Principle of Population. However, this was the isolated voice of a conservative pastor, a member of a class that could not be expected to be anything but pessimistic in a period in which the middle classes, its goods, its weapons, and its ideas, triumphed on every front. The ‘Malthusian population principle’ is a sharp and clear expression of traditional religious pessimism in the face of avaricious nature and the effects of human intemperance, which Botero, Cantillon, Ortes, and others

had already expressed: the means of subsistence offered by nature grow according to an arithmetical progression, while the number of mouths to feed would increase at an exponential rate if they were not curbed by natural scarcity. Besides this, Malthus was able to draw out the political con­sequences of his ‘principle’. As the lower classes could not, unlike the others, use moral restraint to control the catastrophic effects of natural laws, let nature, therefore, look after itself.

From the point of view of economic theory, the population principle is important above all for the use that Ricardo and Torrens were to make of it in connection with their theories of wages. But it also had important implications for the decreasing returns in agriculture, a subject on which James Anderson had anticipated Malthus on some important matters. We will speak more about this in the next chapter.

Malthus, at any rate, was an exception in respect to the general optimism of the Smithian economists. ‘Smithian’ is perhaps the best term to define a kind of political economy that had finally found, in The Wealth of Nations, its foundations. For the first time, all over Europe, economists discovered that they were speaking the same language and had the same ideas of the aims, limits, and scope of economic science: those assigned to them by Smith.

This theoretical homogeneity, finally found after such a long search, did have its price, as is shown by the scant progress made by economic analysis in this period. But the aspect most worth highlighting in the panorama of Smithian economics is this: the few economists who did make some original contribution were all working within only one of the three components of Smith’s thought, that of the individualistic competitive equilibrium, while they overlooked the macroeconomic and institutionalist components.

2.3.2. Bentham and utilitarianism

One of these contributions was utilitarianism, the natural conclusion of a line of thought which had been developed especially in Great Britain and which finally led to the work of Bentham.

First of all, utilitarianism provided a new way of conceptualizing human motivation towards action. The increasing specialization of labour and, more generally, the nature of capitalist production had led to the consid­eration of individuals, not as integrated parts of an interdependent whole, but as social atoms fighting with impersonal and unchangeable market forces.

The book opens with the assertion according to which every human motivation, at every place and time, can be traced back to a single principle: the desire to maximize utility—‘that property of any object, whereby it tends to produce benefit, advantage, pleasure, good or happiness’ or to prevent ‘mischief, pain, evil, or unhappiness to the party whose interest is considered’ (p. 86). By tracing all human motives back to a single principle, Bentham laid the grounds for the construction of a science of human happiness—a science endowed with mathematical precision just like physics. And he even sug­gested a method for the quantification of pleasures: ‘The value of a pleasure or pain will be greater or less according to several circumstances: its intensity, its direction; its certainty or uncertainty; its propinquity or remoteness; its fecundity; its purity; its extent’ (p. 97).

Another pillar of Bentham’s theory was the idea that human beings, besides being hedonists, are also self-interested: ‘In the general tenor of life, in every human breast, self-regarding interest is predominant over all other interests put together... Self-preference has place everywhere’ (Economic Writings, III, p. 421).

Lastly, the third pillar of Utilitarian ethics is consequentialism, the theory which affirms that the moral judgement of an action refers to the con­sequences it produces and not to the intentions of those who promote it. If the consequences are good, the action will be judged as morally good.

All the three ideas were to be assimilated into successive theories of utility­value. Smith had rejected the conception according to which the exchange value can be explained by the utility of goods. He used the famous example of water and diamonds (water possesses a high use value and a low exchange value, in exact opposition to diamonds) to illustrate the absence of a necessary relationship between utility and value. The neoclassical economists were to explain later that it was not the total utility of a good that determines its exchange value but the marginal utility, or rather the increase in utility which is derived from a small increment in the availability of a good. Bentham, however, had already reasoned in more or less the same way:

The terms wealth and value explain each other. An article can only enter into the composition of a mass of wealth if it possesses some value. It is by the degrees of that value that wealth is measured. All value is founded on utility... Where there is no use, there cannot be any value. (An Introduction..., p. 83)

And again:

Value in use is the basis of value in exchange... This distinction comes from Adam Smith but he has not attached to it clear conceptions... The reason why water is found not to have any value with a view to exchange is that it is equally devoid of a value with a view to use. If the whole quantity required is available, the surplus has no kind of value. It would be the same in the case of wine, grain, and everything else. (PP. 87-8)

The principle of marginal utility and its link with the theory of value is anticipated here, albeit in a confused way and without questioning Smith’s authority to any great extent.

2.3.3. The Smithian economists and Say

Bentham was the first of the Smithian economists to seek the explanation of value in use value rather than in the cost of production, a tendency that may seem surprising to those who are accustomed to identifying ‘classical’ theory with Ricardian theory.

This tendency was extremely clear in Smith’s German followers.

But the person who followed this road to the point of knowingly going beyond Smith was James Maitland Lauderdale, who not only rejected Smith’s theory of value but also recognized the implications of such a rejection for the theory of production. With regard to value, Lauderdale concentrated his analysis on the forces of supply and demand, endeavouring to explain the latter by the subjective factors that define human needs and the former by the scarcity of the goods necessary to satisfy those needs. In regard to production, he was one of the first to put forward the argument that, to understand the role played by machinery in the productive process and in the production of wealth, it is necessary to focus not so much on its ability to co-operate with labour as on its ability to substitute for it. This view logically leads to a theory of three productive factors, labour, land, and capital and their combination in the production process.

Similar arguments were put forward in France by an economist who, unlike Lauderdale, still considered himself a follower of Smith: Jean-Baptiste Say, the ‘optimist’. Say combined in an unusual way the two basic arguments of the Smithian theory of value, the one concerning the dependence of the variations of market prices on the forces of supply and demand and the other relating to the dependence of natural prices on the conditions of production. He thus formulated a theory which was rather more similar to that of Galiani, whose influence was still strong in France, where it had been consolidated by Condillac.

It is interesting to see which theories of production and distribution were linked to such a theory of value. The production of goods requires the utilization of three types of ‘productive service’: those of labour, capital, and land. As the value of goods depends on the demand and the efforts sustained to satisfy it, and as such efforts require the utilization of all three of the productive services, value cannot be entirely reduced to labour: all three services contribute to its formation. Furthermore, each productive service receives an income that is determined by the demand for the goods it con­tributes to produce. The intermediary between the product markets and the productive service markets is the entrepreneur. He compares the price that the consumers are prepared to pay for a good with the expenditure necessary to produce it, that is, with the costs of the productive services. In this way the demand for consumer goods is transformed into the demand for productive services, and the prices of the latter turn out to depend on their indirect contribution to the satisfaction of consumer needs.

The concept of the dependence of the values of goods on the prices of all the productive services, a vague rationalization of Smith’s additive theory of prices, led Say almost naturally, although in a confused way, to a strange theory of distribution—strange with respect to its Smithian origin: each productive service receives a price which is equal to its productive contri­bution. Thus, the capitalist economy is not only efficient in the allocation of the resources, as stated by the theorem of the invisible hand, but also equitable in the distribution of income. There is an undoubted link between Say and Smith, but Marx was right about the nature of this link when he stated, in the Theories on Surplus Value, that ‘Say separates the vulgar notions occurring in Adam Smith’s work and puts them forward in a distinct crystallized form’ (ιιι. 501).

Say also went beyond Smith in his attempt to justify laissez-faire philo­sophy. Although Smith restricted himself to maintaining that the greed of capitalists would lead a competitive economy to allocate the resources in such a way as to satisfy the demand for the goods on the various markets, he also pointed out that the adjustment process would have to pass through the continual appearance and disappearance of sectoral disequilibria which would never be completely eliminated. The problem remained as to whether such disequilibrium situations would compensate for each other, so as to ensure equality between aggregate supply and demand, or would generate macroeconomic malfunctioning. Smith seems to be vaguely indicating the second possibility when he theorized the tendency of the rate of profit to fall as a consequence of an excess supply of capital in all the industries.

On the contrary, Say tried to demonstrate the impossibility of a general­ized excess supply. This is the famous Say’s Law, also known as the loi des debouches or ‘law of markets’, according to which supply always creates its own demand. Say first restricted himself to observing that the value of the aggregate production is necessarily equal to the aggregate value of the dis­tributed incomes. This is an accountancy identity that nobody would object to. As incomes are purchasing power, it is also possible to say that the produced goods always create the purchasing power corresponding to their value. From here to say that the production always creates its own demand may seem a small step. In fact it is enormous. One must add that incomes are entirely and immediately spent—a hypothesis that Say endeavoured to jus­tify, especially in his Cours complet d’economie politique pratique (1828), in an attempt to reply to the various criticisms aimed against his first formulation of the law, and taking into consideration the controversies that had developed both in England and on the Continent. However, the simplest and clearest explanation of the hypothesis on which the validity of the law depends is to be found in the Traite d’economie politique (1803):

It must be stressed that any commodity whatsoever, as soon as it is brought to the market, offers an outlet to other products for the whole amount of its value. In fact, when a manufacturer has produced a commodity, he has an extreme need and wish to sell it, so that its value does not dissolve in his hands. But he is no less willing to get rid of the money he obtained from the sale of the commodity, precisely in order to prevent the value of the money vanishing by remaining idle. Now, one cannot get rid of one’s own money except by purchasing some product. Therefore it is clear that the very production of a commodity immediately opens an outlet to other products. (pp. 141-2) Thus the purchasing power generated from the production process is no longer only potential demand; it is also, and always, effective demand. This leads to the conclusion that situations of aggregate excess supply are impossible, even when all the single markets are in disequilibrium. Say’s Law excludes the possibility of crises or general gluts. At this point it still remains to be seen if it also excludes unemployment. We will return to this argument in the next chapter, when we deal with the Ricardian use of Say’s law.