The Rise of Political Economy as a Science: Methodology and the Classical Economists

Classical Economics

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His charge of ahistoricism meant essentially this: Political economy took its categories for granted precisely because it did not know the historical process through which they had been created. It was unable to reproduce this real process in thought and therefore saw in the categories of bourgeois political economy the expression of the essence of bourgeois production. In short, it fell under the illusion that the relations of modern economy not only appeared according to the categories of political economy, but that these relations really were as they appeared.

Marx, in his review of the work of Petty, Smith, Ricardo and others, rejected this essentially idealist position. He is not interested in past thinkers merely from the point of view of tracing the origin and growth of his own ideas, nor merely in paying his intellectual debts, as it were.

The Theories of Surplus Value intended by Marx, we remember, as a fourth volume of his work is not a history of economic thought in the conventional sense. It was, Engels tells us,. A detailed critical history of the pith and marrow of Political Economy, the theory of surplus-value and develops parallel with it, in polemics against predecessors, most of the points later investigated separately in their logical connection in the manuscripts for Books II and III.

Engels, Preface to II. This was a task which could be carried out only by somebody conscious of the fact that these categories were themselves a product and a manifestation of the actual emergence of the social relations of capitalist production. At one point Marx draws attention to the fact that for thousands of years — ever since the appearance of commodity production in the ancient world — men had striven to discover the nature of value.

It was only in the eighteenth century that they were able — in the shape of political economy — to make significant progress along this road. And this progress was made possible only because the social conditions in which political economy operated — the fact that commodity production was becoming predominant — made possible the clarification of issues which previously had, of necessity, remained obscure.

Now when Marx criticised the political economists for the ahistorical nature of their work, he meant that they could not grasp that their own science had emerged and developed only under these determinate conditions. Political economy laboured under the serious misapprehension of all bourgeois thought that the categories of its subject value, capital, money, labour, etc. They conflated the laws specific to a determinate mode of production with laws they thought to he universally valid; they confused social with natural law.

Political economy was fond of the parable of Robinson Crusoe. Marx did not object to the indulgence in this type of story as such. He did object, however, to the fact that the modern eighteenth-century individual was projected back into history. The individual was not conceived as developing historically through definite social relations, but as posited once and for all by nature.

History was confused with nature; pre-capitalist economic forms were treated with the same disdain as Christians treated pre-Christian religious forms. Now in drawing attention to this ahistorical outlook of Ricardo and others, Marx was not making a general criticism about the starting point of these thinkers which, once having been made, could be left behind, as it were.

For Marx, the ahistoricism of political economy is a fatal weakness which ultimately permeates every aspect of its work and is the ultimate source of its disintegration. For Marx, Physiocracy was the first genuine school in political economy. It consisted of a group of writers all of whom sought to provide a critique of mercantilism, a system which had imagined that value and its magnitude resulted from exchange. Against this the Physiocrats counterposed the notion that forms of production were physiological forms arising from the necessities of production and independent of will and politics.

They thereby turned the attention of economics towards a study of the social conditions of production. We know of course that the decisive weakness of this school lay in the fact that this production was seen only in its immediate, concrete form; for according to Quesnay and his followers labour on the land was alone productive of value, a conception which persisted with Smith, although in the case of the latter it occupies only a subordinate position. This narrowness in the Physiocratic view was, Marx held, a reflection of the then limited stage reached in eighteenth-century French economy which remained predominantly based upon agriculture.

Despite this limitation, the work of the Physiocrats none the less constituted a decisive step forward for all the work that was to follow in the investigation of capitalist economy. This was so because the source of contradictions in the Physiocratic system stemmed from its efforts to analyse feudalism from a consistently bourgeois standpoint.

When Marx turns to deal with the work of Adam Smith he again stresses that the advances which this work involves have their ultimate source in the economic changes taking place in the latter half of the eighteenth century. The Physiocrats had been able to begin the investigation of surplus value the difference between the value of labour power and the value created by it only because it appears most palpably in the sphere of agriculture, the primary branch of production.

The total means of subsistence which the labourer consumes is smaller than the total means of subsistence he produces. However, in manufacturing — which was emerging much more rapidly in Britain than in France during this period the worker does not directly produce either his means of subsistence or an excess of them. Under manufacturing the process is mediated, is an indirect one, operating through the various acts of circulation of all commodities within the capitalist system.

And this was equally true in the case of surplus value; while this surplus appeared in the form of a surplus of use-values agricultural products no abstract conception of its nature was either possible or necessary for pre-Smithian economics. Specifically, the advance marked by The Wealth of Nations was to be found in the fact that it grasped that labour in general and not one of its forms is value-creating. Marx again draws attention in his commentary on Smith to the material basis for this step forward.

But as in the case of the French economists, so now in the case of Smith: Marx sees definite limits to these important advances. Marx regarded Smith as a transitional figure and one to whom all later schools, including that of modern neoclassical theory, can, with some justification, trace their origin. From the point of view of the method of political economy Smith continued and extended the classificatory work of his predecessors, notably that of William Petty.

At the same time Smith was the first to attempt an abstract analysis of the capitalist mode of production — a search for the laws , that is the regularities , of its development. It was this latter side of his work which was to be carried forward by Ricardo some fifty years later. On occasions, Smith sees the value of commodities as determined by the quantity of labour involved in their production, as when he gives the example of beaver and deer:.

In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another.

If amongst a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. Smith, Value, Studies by Marx. In other places, however, Smith drops this labour exchange theory in favour of a labour command notion of value, or, what amounted to the same thing, a theory which sees exchange-value as determined by the level of wages. That is to say, the appearance of wages along with profits and, once private property and land is established, rent, for Smith overthrow the determination of value by labour-time.

In every state of society the price of every commodity finally resolves itself into some one or other or all of these three parts; and in every improved society all the three enter more or less, as component parts, into the price, of the far greater part of commodities. This he did by endeavouring to demonstrate that the determination of value by labour-time could be made consistent with the existence of wages, profits and rent. Indeed, he went further and attempted to show that the determination of value by labour-time was the only sound basis on which the distribution of the social product between wages, profit and rent could properly be explained, a task which he took to be the major one facing political economy.

From the very outset of the Principles Ricardo notes the different and ultimately incompatible conceptions of value in The Wealth of Nations. Adam Smith, who so accurately defined the original source of exchangeable value and who was bound in consistency to maintain that all things become more or less valuable in proportion as more or less labour was bestowed on their production, has himself erected another standard measure of value, and speaks of things being more or less valuable in proportion as they will exchange for more or less of this standard measure. Sometimes he speaks of corn, at other times of labour, as a standard measure; not the quantity of labour bestowed on the production of an object, but the quantity which it can command in the market: Food and necessaries in this case will have risen per cent if estimated by the quantity of labour necessary to their production, while they will scarcely have risen in value if measured by the quantity of labour for which they will exchange.

Ricardo knew that the duality to which he was here drawing attention had to be eliminated if political economy was to progress as a science. It was through his efforts to grapple with the theoretical problems left by Smith that Ricardo was forced to develop a quite different method in he analysis of economic phenomena. Political economy, Ricardo came to insist, must begin with one fundamental principle — the determination of value by the quantity of labour bestowed upon the production of a commodity.

All those economic phenomena from the realm of competition which appear to contradict this law must be rendered compatible with it, and the law of value thus made the axis of a scientific political economy. The general method adopted by Ricardo in his Principles is as follows: He examines the extent to which the law of value is in contradiction with the manner in which it appears in competition, as it presents itself to the unscientific observer.

Ricardo insists, Marx tells us, that,. The basis, the starting point for the physiology of the bourgeois system — for understanding its internal organic coherence and life-process — is the determination of value by labour-time. Ricardo starts with this and forces science to get out of the rut, to render an account of the extent to which the other categories — the relations of production and commerce evolved and described by it, correspond to or contradict this basis, this starting-point. This meant that an equilibrium of people's preferences determined prices, including the price of labor, so there was no question of exploitation.

In a competitive economy, said the marginalists, people get what they had paid, or worked for. Although these three economists of the marginal revolution came to the same conclusion regarding the problem with Classical economics , and subsequent economics became known as neoclassical due to its emergence out of the classical framework, their work eventually led to three schools of economic thought. The main representative of this school after Jevons was Alfred Marshall. Menger argued that goods were valuable because they served various uses of differing importance.

For example, the first pails of water are used to satisfy the most essential uses, and successive pails are used for less and less important purposes. Although water is essential for life it is also plentiful, with the result that the marginal value of water is rather low, much lower than, for example, that of diamonds and gold , whose relative scarcity ensures high marginal value.

Menger used marginal utility theory to refute classical economics ' labor theory of value. Goods acquire their value, Menger showed, not because of the amount of labor used in producing them, but because of their ability to satisfy people's wants. The "value" of a commodity, therefore, Menger claimed, would be equal to the least urgent use to which it was applied.

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Menger and his followers broke from the mainstream, mathematics intensive economic theory and founded their own school of economics. At that time in Germany, the German Historical school , which had emerged in nineteenth century Germany, was dominant. Its approach, as its name indicates, was "historical" and thus relied much on empirical observation and inductive reasoning , rather than deduction from theoretical propositions. In this context a controversy erupted over the method and epistemological character of economics between Menger and his supporters and the proponents of this Historical School, led by Gustav von Schmoller.

It was at this time that members of the German Historical School began to derisively call Menger and his students the "Austrian School" to emphasize their departure from mainstream economic thought in Germany. The core of the Austrian framework can be summarized as taking a "subjectivist approach to marginal economics," and a focus on the idea that logical consistency of a theory is more important that any interpretation of empirical observations.

Ludwig von Mises was prominent in the Austrian school, his theories influencing many other significant economists of the twentieth century. His view that "value lies in us, not in things" exemplifies the subjective theory of value promoted by the Austrian School and opposition to materialism:. Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment Mises , Using the analysis of the individual consumer as the basis rather than starting with classes of goods as had the classical economists , he developed applications of the concept of marginal utility to issues such as the value of money.

Von Mises also produced a critique of a socialist economy , showing that it was not a viable system. Friedrich von Hayek was an early follower of Menger. He was one of the leading academic critics of collectivism in the twentieth century, arguing that all forms of collectivism even those theoretically based on voluntary cooperation could only be maintained by a central authority of some kind.

In his popular book, The Road to Serfdom , Hayek claimed that socialism required central economic planning and that such planning in turn had a risk of leading towards totalitarianism , because the central authority would have to be endowed with powers that would have an impact on social life as well. Building on the earlier work of Ludwig von Mises and others, Hayek argued that in centrally-planned economies an individual or a select group of individuals must determine the distribution of resources, but that these planners will never have enough information to carry out this allocation reliably.

Murray Rothbard — developed and extended the Austrian economics of Ludwig von Mises , in whose seminar he was a main participant for many years. Rothbard established himself as the principal Austrian theorist in the latter half of the twentieth century and applied Austrian analysis to historical topics such as the Great Depression and the history of American banking. Walras' economic theory included the use of mathematics in economics, the notion of free competition, the notion of utility, and price formation in competitive markets.

His work, for the first time, rigorously expressed the view that all markets are related, and that their relationships can be described and analyzed mathematically. This conception of economics led to important new insights about the stability of markets and the capitalist economic system. Walras' work laid the foundation for mathematical economics, in particular the Lausanne school with Italian economist Vilfredo Pareto.

William Stanley Jevons emphasized in the Theory of Political Economy that at the margin, the satisfaction of goods and services decreases. Separating from the Austrian school of economics, the neoclassical approach based on Jevons' work also became increasingly mathematical, focusing on perfect competition and equilibrium.

Alfred Marshall was one of the most influential economists of his time, and is also credited with putting economics on a strong mathematical footing, applying mathematical principles to economic issues, with the result that economics became established as a scientific discipline. He led the British neoclassical school of economics , and was responsible for the emergence of Cambridge University as a center of economic research in the early twentieth century.

Coming after the marginal revolution, Marshall concentrated on reconciling the classical labor theory of value, which had concentrated on the supply side of the market, with the new marginalist theory that concentrated on the consumer demand side.

1. Introduction: What is Economics?

Marshall's graphical representation is the famous supply and demand graph, the "Marshallian cross. Over the long run, argued Marshall, the costs of production and the price of goods and services tend towards the lowest point consistent with continued production. The Wall Street Crash of was the dramatic end of what had been referred to as the "roaring twenties" in America. Many people, including economist Thorstein Veblen , cautioned against the excesses of "the American way," warning of the tendency for wasteful consumption and the necessity of creating sound financial institutions. In the early twentieth century this viewpoint, known as Institutional economics , was the main school of economics in the United States.

Institutional economics is concerned with the social systems, or "institutions," that constrain the use and exchange of resources goods and services and their consequences for economic performance.

Economics, Classical

Following Veblen's critical view of materialistic culture and the tendency of businesses toward production for pure profit rather than to satisfy consumers' needs, institutional economists were typically critical of American social, financial, and business institutions. In , Europe lay in ruins, financially, physically, psychologically, and its future depended on the Paris Peace Conference convened at Versailles.

John Maynard Keynes was the British representative at the conference, and the most vocal critic of its outcome. His observations were laid out in his book The Economic Consequences of the Peace Keynes where he documented his outrage at the collapse of the Americans' adherence to the Fourteen Points , the peace plan devised by President Woodrow Wilson intended to "make the world safe for democracy. Without the changes he advocated, Keynes' dark forecasts matched the world's experience through the Great Depression and the descent into a new outbreak of war in The depression had been sparked by the Wall Street Crash of , leading to massive rises in unemployment in the United States, leading to debts being recalled from European borrowers, and an economic domino effect across the world.

Orthodox economics called for a tightening of spending, until business confidence and profit levels could be restored. Keynes by contrast, had argued in A Tract on Monetary Reform that a variety of factors determined economic activity, and that it was not enough to wait for the long run market equilibrium to restore itself. As Keynes famously remarked:.

Economics, Classical

This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again Keynes Keynes therefore advocated low interest rates and easy credit to combat unemployment. But Keynes believed that in the s, conditions necessitated public sector action.

Deficit spending, he said, would kick-start economic activity. Keynes therefore advocated both monetary management and an active fiscal policy. Keynes helped formulate the plans for the International Monetary Fund , the World Bank , and an International Trade Organization at the Bretton Woods Conference, a package designed to stabilize world economy fluctuations that had occurred in the s and create a level trading field across the globe. Although Keynes died little more than a year later his ideas had already shaped a new global economic order, and all Western governments followed the Keynesian prescription of deficit spending to avert crises and maintain full employment.

After the Second World War , and the death of John Maynard Keynes , a group of mostly American economists worked to combine Keynes' economic theory with statistic method mathematical representations. The development of this new orthodoxy is referred to as the neoclassical synthesis. The theory was developed by John Hicks , and popularized by the mathematical economist Paul Samuelson, who seems to have coined the term, and helped disseminate the "synthesis," partly through his technical writing and in his influential textbook, Economics Mainstream economics in the latter part of the twentieth century was largely dominated by the synthesis, being largely Keynesian on macroeconomics and neoclassical on microeconomics Clark Introductory university economics courses began with the same approach that pulled the divergent strands of economic thought together, presenting economic theory as a unified whole.

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The Chicago school long stood as the only school in America not overrun by the Keynesian Revolution. This Chicago School of economics began in the s with the work of Frank H. Knight and Jacob Viner. It was Viner's criticism of Keynes that made him famous and laid the foundation for the Chicago school's resistance to Keynesian economics. Viner is known for his belief, contrary to the analyses of Keynes, that it is the long-term that really matters.

This more conservative strand of thought reasserted a "libertarian" view of market activity, that people are best left to themselves, free to choose how to conduct their own affairs. The school blossomed into one of the most influential schools of thought after Milton Friedman joined the economics faculty in and then was joined by his long-time friend George J. Milton Friedman stands as one of the most influential economists of the late twentieth century. He argued that the Great Depression had been caused by the Federal Reserve 's policies through the s, and worsened in the s.

According to Friedman, laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth, by gradual expansion of the money supply. He advocated the quantity theory of money, that general prices are determined by money. Therefore active monetary easy credit or fiscal tax and spend policy can have unintended negative effects.

In Capitalism and Freedom Friedman wrote,. There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects Friedman Economists of the Chicago school are known for applying economic analyses to a broad spectrum of issues, many of which have normally fallen within the purview of other disciplines as far ranging as history , law, politics, and sociology.

The late twentieth and early twenty-first centuries have been deeply affected by the growing globalization of the world. Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders.

The term sometimes also refers to the movement of people labor and knowledge technology across international borders. There are also broader cultural, political, and environmental dimensions of globalization IMF Staff In the context of globalization, economists have been drawn to develop fields such as development economics which deals with economic aspects of the development process in low-income countries.

Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example, through health , education , and workplace conditions. Expressing considerable skepticism on the validity of neo-classical assumptions, he mounted one of the few major challenges to the economic model that posits self-interest as the prime motivating factor of human activity. His "capability approach" focuses on "positive freedom," a person's actual ability to be or do something, rather than on "negative freedom" approaches, which simply focus on non-interference.

For example, in the Bengal famine of , rural laborers' negative freedom to buy food was not affected since there was adequate food in the region. However, they still starved because they were not positively free to do anything due to declining wages, unemployment , rising food prices, and poor food-distribution systems which prevented them from acquiring nourishment, and thus they did not have the capability to escape morbidity. Other economists of the time have also rejected neo-classical assumptions. For example, Joseph Stiglitz b.

The fundamental problem with the neoclassical model and the corresponding model under market socialism is that they fail to take into account a variety of problems that arise from the absence of perfect information and the costs of acquiring information, as well as the absence or imperfections in certain key risk and capital markets. The absence or imperfection can, in turn, to a large extent be explained by problems of information Stiglitz , 5. Economic thought has at times focused on the aspects of human nature such as greed and selfishness that generally work against the good of all; at other times, economic behavior has been seen as self-regulating and working toward a common purpose, even supported by the altruism and innate goodness of human beings.

Understanding which of these aspects is dominant, or how they can be brought into balance, is a key issue for the future. The world has moved from ancient times when philosophers and religious leaders were the authority on all things, economic issues included, through the division of disciplines into more specific fields, into an era of globalization and the emergence of a global economy.

As economic thought has developed through these times, the direction appears to be one in which, after separating into a distinct discipline, it now returns to a closer connection with the other disciplines. Using, but not being limited by, the tools developed in such fields—mathematics and computer technology in particular—economists now apply their theories to an ever-increasing array of human activities.

Likewise, the models and findings of schools of thought for a while considered separate from economic study, such as ethics , morality , cognitive science, psychology , and sociology , now are seen as inextricably related to economic models. In this way, the future of economic thought may finally be able to uncover and understand the complex processes and mechanisms which guide economic transactions in human society.

New World Encyclopedia writers and editors rewrote and completed the Wikipedia article in accordance with New World Encyclopedia standards. This article abides by terms of the Creative Commons CC-by-sa 3. Credit is due under the terms of this license that can reference both the New World Encyclopedia contributors and the selfless volunteer contributors of the Wikimedia Foundation.

To cite this article click here for a list of acceptable citing formats. The history of earlier contributions by wikipedians is accessible to researchers here:. Some restrictions may apply to use of individual images which are separately licensed. History of economic thought. Previous History of agriculture. Next History of logic. Socialist economics and Karl Marx. Carl Menger and Austrian school of economics.

Classical economics

Leon Walras , Vilfredo Pareto , and Lausanne school. Institutional economics and Thorstein Veblen. John Maynard Keynes and Keynesian economics.

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