The Doctrines of Political Economy in the Anglo-Saxon Tradition
We must lightly touch on the prehistory of economics by considering briefly the doctrines of political economy in the Anglo-Saxon tradition. The word ‘economy’ in medieval times originally referred to the household of the feudal landlord.
‘Political’ meant taxation on citizens and farmers. The language of political economy still remains at prestigious universities. For instance, the title “Drummond Professor of Political Economy” at Oxford University is still given to the holder of a chair in neoclassical economics.The main subjects of political economy were the theory of value, the law of population, and the theory of international trade and comparative advantage. David Ricardo (1772-1823) was one of the greatest scholars of political economy. Thomas Malthus (1766-1834) was also influential, writing about population dynamics from an economic standpoint. His works greatly influenced biologists, providing the first real interaction between economics and biological sciences. The next link emerged from the invention of game theory by von Neumann and Morgenstern (1944), followed by evolutionary game theory, proposed by Maynard Smith and Price (1973).[8] Evolutionary game theory was the first interaction drawing from biologists to economists rather than the reverse.
David Ricardo’s representative work was On the Principles of Political Economy and Taxation (Ricardo 1817). He put forward many arguments, two of which are particularly well known, the differential rent theory and the international trade theory, or theory of comparative advantage.
The differential rent theory states that rent arises because of the heterogeneity of lands, i.e., from differences in the fertility or location of agricultural land. These factors are the result of evolution of technology as well as the transpiration system. In this theory, rent on the worst area becomes zero over time.
The boundary condition of rent on the worst land is usually zero and then becomes positive as the margin of cultivation is extended. Land rent may increase as the population increases.[9]The international trade theory or theory of comparative advantage states that all nations could benefit from free trade through specialization of their industry structure, even if that nation is less efficient at producing all kinds of goods than its trading partners. The theory, however, contains a special imperative that both nations committed to trade must agree to mutual specialization of their economies, to generate higher domestic efficiency. For many years, there were few generalizations of comparative advantage of international trade theory towards a general case of n commodities and m countries. It was only in 2007 that a mathematically complete proof of a many-country, many-commodity case with intermediate goods and choice of production techniques was published by Shiozawa (2007).
Both propositions are important to demonstrate a relative effect. Ricardo focused on the differences and the interaction of the qualities of production factors either domestically or internationally. The first proposition is quite ingenious in envisaging that fertilization of land and a change of environment around it, for example because of the building of a railway, can change the quality of the land. The second proposition was criticized by his contemporaries in view of the need for nations to defend their own positions, a criticism inherited from List (1841, 1910) in Austria.
Ricardo’s priority of economic efficiency was also found in the Corn Law debates in the United Kingdom, about a protective policy for agricultural produce. At that time, the price of corn was regarded as the wage rate for workers. When the Corn Laws were abolished in 1846, the real wage rate could increase. Securing this increase required an increase in the importing of cheaper corn from overseas.
As a result, the international division of labor was accelerated between the United Kingdom and her partner countries.The interest in heterogeneity and interaction was not inherited by the neoclassical economists, who accepted only those parts of Ricardo’s theories that dealt with homogeneities of labor and capital around the laws of supply and demand. In the nineteenth century, both Europe and the United States were exposed to a movement to establish factory systems, which was motivated by a new series of technological innovations, and required a homogeneous labor force and capital. Homogeneity is very important for industry. Neoclassical economists naturally accepted this dominant direction of travel.
There were three great fathers of neoclassical economics, Walras (1874), Menger (1871), and Jevons (1871), who set out the Marginal Revolution of Economics in the 1870s. Before them, however, Gossen (1854) formulated the theory of marginal utility in a complete mathematical form. His father was a Prussian tax collector, so he was obliged to pursue that path, abandoning his interest in cosmology, leading to a developing interest in economic theory. The marginal theory of utility requires the assumption of ‘independent individuals’ whose preferences are not distorted by the external world. This assumption may be reminiscent of a statement of inviolable individual right, but also enables an internal comparison between heterogeneous individuals. To secure the design of individualism, heterogeneities were regarded as exceptional.
A similar civilization to that driven by the English industrial revolution also emerged in Prussia. Neoclassical economics accepted all the new ‘ideal’ features of the industrial revolution, and therefore accepted the idea of a classical market with homogeneous agents. Similarly, just as neoclassical economics is a product of its historical origin, we can also understand that our economic theories must change over time, as the social or institutional setting changes. This understanding may naturally bring new developments in economics.
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