Classical Political Economy

Before addressing the various attempts to revive classical political economy at Cambridge, we must first understand what classical political economy is. The term ‘classical’ political economy was first used by Marx in order to distinguish the contributions of the classical economists from the contributions of the ‘vulgar’ economists which, according to Marx, were transforming the scientific analysis of classical political economy into a superficial analysis of commonplaces, and, worse, a mere apologetic for the existing bourgeois economy and society.

For Marx, a scientific study of the underlying causes of value must look beyond supply and demand forces, but should instead examine the underlying conditions of production (Ricardo made the same point to Malthus). Thus, for Marx the classical economists were those that looked at the process of (re)production in order to find the causes of value, determined in terms of cost of production. Vulgar economy, in turn, does not go beyond supply and demand analysis (which Marx saw as mere superficial phenomena), and takes it to be the ultimate determinant of value.

We can identify William Petty, Richard Cantillon, Francois Quesnay, Smith, and Ricardo as the more influential authors who fit into Marx’s definition of classical political economy. Petty looked at labour and land as the ultimate causes of wealth. For him, the cost of a commodity could be defined in terms of the land and labour that is necessary to produce it. However, Petty also noted that we can find a relationship between labour and land by finding the quantity of land which is necessary to provide sustenance to a labourer for a given quantity of time. This means we can measure cost ultimately in terms of the quantity of land necessary to produce a commodity (where this quantity of land includes a part which is necessary to provide food for the labourer). Cantillon agreed with this procedure of converting labour into land, which provided an objective measure of cost in terms of the quantity of land.

Quesnay and the Physiocrats also adopt an objective conception of value, focusing on land. In the Tableau Economique, Quesnay provides the first systematic account of the circular process of economic reproduction. For the Physiocrats, agriculture is the only activity which generates a surplus, while other activities merely reproduce the capital they use. In the Tableau, the surplus is consumed by the landlords, who do not contribute to the production process. The surplus is then the part of production which is not necessary for the reproduction of the existing economic system. According to Quesnay, prosperity occurs when the surplus is used mainly in productive activities, and decadence comes when the surplus is used mainly in luxurious consumption.

Smith signals an important change in the theory of value, switching the emphasis from land to labour. For Smith, the value of a commodity is measured ultimately in terms of human labour. As Smith focuses on labour, rather than land, he sees all sectors where productive labour is performed as sectors that generate a surplus, rather than seeing agriculture as the only sector where a surplus is produced, as Quesnay did. Smith concedes that agriculture is the most productive activity, and he notes that this fact led Quesnay to the exaggerated claim that agriculture is the only productive activity, that is, the only activity that produces a surplus above what is necessary for the reproduction of the existing economic system. But Smith notes that other sectors also produce a surplus. Like Quesnay, Smith believed that the economy and society will flourish when the surplus is used in productive activities, and decadence arises when the surplus is used in luxurious (non-productive) consumption.

However, Smith’s analysis of cost in terms of human labour was somewhat ambiguous, leading to opposing interpretations. The difference at stake here is between commanded labour, which is how much labour a given commodity can purchase, and embodied labour, which is how much labour was spent in the production of the commodity. Ricardo argued that value consisted of embodied labour. Malthus, in contrast, argued that Smith’s measure of cost was commanded value. In so doing, Malthus claimed to be recovering Smith’s approach against Ricardo’s alleged distortion of it.

The fact that Smith argued both for commanded labour and embodied labour is connected to the difference between the measurement of value, where Smith used commanded labour, and the cause of value, which can be taken to be embodied labour. To understand the debate between Ricardo and Malthus, we must understand their different approaches to the theory of value, which are connected to the fact that Malthus focused on the measurement of value, while Ricardo wanted to go beyond the measurement of value, to its underlying causes, as Marx did more explicitly.

According to Ricardo, the value of the commodity tends to the cost of production, which depends upon embodied labour. Ricardo (1817) [1821] presupposes an economy where there is no full employment of labour, that is, where labour is available for further production. Ricardo argues that if demand drives the price above the cost of production, the quantity brought to the market can be increased using the labour which is available for further production. If demand drives the price below the cost of production, the quantity brought to the market can be reduced until the price reaches the cost of production.

For Ricardo, as for Smith, the cost of production includes the surplus, since it is constituted by wages, profits, and rent. Thus, the cost of production is the natural price. The market price, which is the price that is actually observed, is permanently gravitating towards the natural price, that is, towards the cost of production, due to the activity of supply and demand. But for Smith and Ricardo, supply and demand forces merely explain the gravitation of the market price which tends towards or fluctuates around the natural price. Smith defined effectual demand as the demand of those who can pay the natural price, and are willing to do so. This means that the natural price is not determined by supply and demand. Rather, the natural price is a determinant of effective demand, since effective demand is defined in terms of the natural price itself. The natural price, in turn, is explained in terms of the cost of production.

Malthus (1820), however, argued that the cost of production of a commodity should be measured in terms of commanded labour which is, remember, how much labour can be purchased using a given commodity. Malthus notes that Smith himself had made reference to commanded labour as a measure of value. But the value that a commodity can command in a market is determined precisely by supply and demand forces. In fact, Malthus noted that the cost of production is, for Smith, constituted in terms of the sum of wages, profits, and rent required to produce one unit. Moreover, Malthus argued that each of these components of the cost of production is, in turn, explained by supply and demand forces. For Malthus, supply and demand are the ultimate determinants of value and wealth, and he argues that if we follow this line of reasoning, this must also be the case in Smith’s analysis.

Ricardo, in turn, was critical of Smith’s ambiguity concerning commanded labour and embodied labour, and argued that the cost of production must always be interpreted in terms of embodied labour, that is, how much labour time was actually consumed in the production of a commodity. This means that instead of looking to market exchange in order to find commanded labour, as Malthus did, Ricardo looked at the production process in order to find embodied labour.

Moreover, Ricardo did not explain wages, profits, and rent in terms of supply and demand forces. For Ricardo, wages were set in terms of the subsistence level. Here, Ricardo accepts Malthus’s principle of population (which was, in fact, also present in many other previous authors, including Smith, Steuart, and Cantillon) according to which the increase in population and the ensuing competition between workers leads wages towards the subsistence level. However, for the various classical authors, the subsistence level did not denote merely the minimum threshold for bare physical survival. Rather, the subsistence level constitutes the standard of living which is customary and acceptable according to existing habits and conventions. The level of wages is thus set by institutional factors.

The surplus is defined as the difference between total production and wages, each measured in terms of embodied labour. For Smith, the surplus is the excess of what masters receive at the end of each production period over their advances (wages, tools, raw materials, and the like) at the beginning of the period of production. Ricardo develops this scheme, defining profit as the surplus value obtained on the worst land. Rent is the difference between value obtained on a given land and the value obtained on the worst land.

Ricardo did not take wages, profits, and rent to be independent factors, which can be merely added up in order to obtain the natural price. Since profits are the difference between the value of production and the value of wages, the latter set by institutional factors, then an increase in wages will decrease profits. Wages and profits are thus interdependent. Moreover, if the worst land increases its productivity, while other lands maintain their productivity, profits increase and rent decreases, since rent is the difference between the productivity of these lands (this simple example presupposes that the worst land does not cease to be the worst land in virtue of this improvement, but, if it does, the interdependence between rent and profits just becomes even more complex).

We can then see that while Malthus looks at market exchange, and the interaction between supply and demand, as the ultimate determinants of value (of commanded labour), Ricardo looks at the production process as the ultimate determinant of value (measured in terms of labour embodied in the production process). Ricardo criticised Smith’s lack of clarity on these matters and developed Smith’s approach in an attempt to make it a coherent one. Malthus felt that in so doing, Ricardo was moving away from Smith’s thought. Thus, Malthus presents his contribution as a return to Smith, away from Ricardo’s development of Smith’s thought. Rightly or wrongly, Malthus believed himself to be Smith’s most faithful disciple.

Malthus’s contribution is the first attempt at a revival of Smith’s thought (or what Malthus believed to be Smith’s thought) by an influential author associated with Cambridge. If we follow Keynes’s acknowledgement of Malthus as ‘the first of the Cambridge economists’, we can then see that the Cambridge economic tradition seen in such broader terms starts as a revival of Smith’s classical analysis.