-85- VII. THE INADEQUACY OF LATE CLASSICAL THEORY The theories of wages and capital advanced by Ricardo made considerable sense in the context of their time. The analytical assumptions that wages were approximately fixed and that capital was primarily circulating and variable together did approximate the behavior of the real economic relations and transactions that lay behind the abstract analytical constructs employed by Ricardo. No similar statement holds for the theories of wages and capital set forth by John Stuart Mill--his t.heories were almost as "agrar- ian" as the theories of Ricardo and thus were unsuited to help shed light on the operation of the economy of Britain in the late nineteenth century. The Malthusian theory of population so strongly believed by J.S. Mill had no empirical support in the experience of the nineteenth century. Both population and wages had risen sharply-- although not steadily.· This was generally admitted, and had been known ever since the 1830's. In 1837 Herman Merivale, Oxford's Drummond Professor of Political Economy, attacked those who claimed that machinery and science, and facilities of communication, are outstripping the rapid march of numbers, and rendering our sage (Malthusian] expectations wholly imaginary. But even Merivale had to admit that the anti-Malthusian position had been substantially strengthened by the "extraordinary advance of England in these respects, in the course of the last few years.IIl -86- Yet in spite of its lack of empirical support, the Malthus- ian theory took a very long time to lose its position at the cen- ter of political economy. In the middle of the 1890's, the Univer- sity of Cambridge Handbook demanded that honors B.A. candidates in the "Moral Sciences" have, under the heading of "Political Economy," a thorough knowledge of the "causes that determine or affect . . . the advance of capital and population.,,2 Even in 1909, denials of the Malthusian population principle tended to be circumstantial and equivocal: In the writings of no contemporary economist, in Great Britain or abroad, does the idea that population is consistently tending to press upon the means of sUbsistence occupy the same conspic~ous and principle place as it does in Mill. Clearly a theory that held that the prosperity of the work- ing class depended principally upon their being taught "moral re- straint" had few insights it could give into the operation of the late nineteenth-century British economy. In the matter of the short-run determination of wages Mill and his peers were similarly astray. For the dominant theory of wages--when the third generation had a theory of wages--was the doctrine of the wage fund.4 Eut the idea of the wage fund depended on a relation between the real wages of the workers and the national capital (conceived as a stock of wage goods) that was even approx- imately true only in the context of a completely agricultural eco- nomy and that made no sense at all in an economy in which industrial capital was predominant. It would have made far more sense had Ricardo, rather than -87- J.S. Mill, advanced the wage fund theory. For it seems a natural extension of Ricardo's Corn Model: there is nothing that can be done with last year's production except to feed it to this year's workers. Ricardo, however, is kept from the wage fund theory by his primary belief that wages are fixed in the short ~un; once this primary belief is dropped, the rest of Ricardo's model leads naturally and inevitably toward the wage fund. Mill's conception of capital is also very close to Ricardo's. And Mill's view of capital as either advances to workers or payments for quickly used raw materials means that most of the interesting questions about the role of capital in an industrial capitalist economy cannot be raised within his framework. Capital goods become merely consumption goods in another guise; the valuation of capital is not a problem. A given investment decision does not lock capital into a particular line of business for decades; the possibility of long-run disequilibrium is not a problem. Capital goods have short lives; the formation of capitalists' expectations is not a potential source of instability. In Mill's framework, the business cycle is completely unintelligible. And his analytical constructs of "capital" and "profit" shed little light on the behavior of the aggregates that they supposedly represent. Possibly most important of all, Mill's capital is not the embodiment of technology. Therefore issues of innovation and the dynamics of technical progress are completely ignored. Moreover, Mill's explanation of the rate of pFofit is completely unsatisfactory. His version of the Abstinence theory makes no sense at all without marginal analysis; and his version of the physical-surplus theory itself depends on his inadequate idea of the -88- wage fund. Mill's framework sheds no accurate light on the determination of the rate of profit, which is probably the most important economic issue in the context of an industrial capitalist eco- nomy. The views Mill and his peers of the third generation held of wages, capital, and profit look very much as if they were drawn directly from the mind of Ricardo. The third generation's conception of capital is identical to Ricardo's. The third generation's ideas of wages centered around the wage fund--an idea which is implicit in Ricardo's Corn Model once the assumption of fixed shortrun wages is dropped. The third generation's ideas of profit were a combination of Ricardo's physical~surplus theory and Senior's Abstinence theory; the Abstinence theory is also implicit in the works of Ricardo, in his obiter dictum that even in the stationary state the rate of profit will be greater than zero.S The failure of the third generation to move beyond theories implicit in Ricardo is puzzling. For ideas that would have rendered classical political economy better adapted to analyze the economy of late nineteenth-century Britain were strongly present within the thoughts of the second generation of the classical political economists. In order for classical political economy to have better equipped itself to analyze an industrial 'capitalist economy, it need not have gone through a complete theoretical revolution, transformed itself into a Marxist exploitation theory or a neoclassical pure theory of exchange. It need only have absorbed into its orthodoxy some of the ideas of its members like Longfield, Scrope, Thornton, and Jones. -88- wage fund. Mill's framework sheds no accurate light on the determination of the rate of profit, which is probably the most important economic issue in the context of an industrial capitalist eco- nomy. The views Mill and his peers of the third generation held of wages, capital, and profit look very much as if they were drawn directly from the mind of Ricardo. The third generation's conception of capital is identical to Ricardo's. The third generation's ideas of wages centered around the wage fund--an idea which is implicit in Ricardo's Corn Model once the assumption of fixed shortrun wages is dropped. The third generation's ideas of profit were a combination of Ricardo's physical~surplus theory and Senior's Abstinence theory; the Abstinence theory is also implicit in the works of Ricardo, in his obiter dictum that even in the stationary state the rate of profit will be greater than zero.S The failure of the third generation to mOVe beyond theories implicit in Ricardo is puzzling. For ideas that would have rendered classical political economy better adapted to analyze the economy of late nineteenth-century Britain were strongly present within the thoughts of the second generation of the classical political economists. In order for classical political economy to have better equipped itself to analyze an industrial 'capitalist economy, it need not have gone through a complete theoretical revolution, transformed itself into a Marxist exploitation theory or a neoclassical pure theory of exchange. It need only have absorbed into its orthodoxy some of the ideas of its members like Longfield, Scrope, Thornton, and Jones. -89- How would the third generation of the classical economists have analyzed the economy they found themselves in if they had drawn, for their theoretical orthodoxy, on the work of Scrope and Longfield rather than on the work of McCulloch and Senior? With respect to the theory of wages, the third generation would not have been that much better off. Neither Scrope nor Longfield had a satisfactory theory of the determination of wages. Scrope believed that wages were determined by bargaining, and that as productivity increased the wage of labor would increase alongside it. Longfield believed that wages were a residual, and that they were equal to the value added to the product by labor discounted at the prevailing rate of profit back to the time at which wages were paid. In actual fact, the process of the determination of wages in late nineteenth-century Britain was exceedingly complex. Large sectors of the economy set wages according to the demand and supply of a competitive labor market. Still other sectors had never possessed a competitive labor market; in those sectors, wages were largely set by ideas of tradition and justice. A surprisingly large segment of the working class--particularly the more highly skilled workers--was organized into unions, and so had its wages set by a process of organized bargaining. No theory that did not go into great institutional detail could be an adequate tool for the analysis of the distribution of income to the working class. And neither Longfield nor Scrope paid sufficient attention to institutional detail to give great insight into the actual behavior of wages. Still, a residual or a productivity theory of wages would have been a better tool for the third generation of the classical shapeType75fBehindDocument1pWrapPolygonVertices8;8;(12289,21500);(11443,21500);(11443,16460);(0,16460);(0,0);(21500,0);(21500,12168);(12289,12168)posrelh0posrelv0pib economists than the wage fund theory with which they actually worked. Had the third generation of classical economists adopted Longfield's theory of capital, however, then they would have been in a far better position to analyze the economy of late nineteenthcentury Britain. According to Longfield's theory, the crucial characteristics of capital were that it was fixed, scarce, and physically productive. In any approach derived from it, time preference, abstinence, and capital as "advances of wages" would have taken second place to questions of expectation, valuation, and the structural determinants of investment. Longfield's theory happened to place stress on just those characteristics of capital that were becoming representative of the entire capital stock as he wrote. Longfield's and Scrope's theories could have been fitted into a classical analytical framework--after all, Longfield, Scrope, and their disciples did so. Furthermore, Longfield and Scrope were not isolated outliers, thinkers out of touch with the main currents of thought in classical political economy who just happened to write Principles texts. Instead, Scrope and Longfield represent currents of thought that were very strong among the economists of the second generation. Bailey, Butt, Jones, Lawson, Lloyd, Rae, Thornton, some of the later writings of Torrens, and some of the least religious writings of Whately all show elements present in the Principles of Scrope and Longfield. In fact, there were probably fewer political economists in Britain in the 1830's working in the tradition of McCulloch than working in the tradition of Malthus, Scrope, and Longfield. The spread of theories advanced by economists of the second generation was substantial: it is this =91- breakdown of the original Ricardian orthodoxy of the first generation that leads Meek to conclude that the Ricardian school collapsed in the late 1820's.6 Yet John Stuart Mill focused the doctrines of the third gen- eration into a tight band around an orthodoxy that was, in fact, closer to the orthodoxy of Ricardo in the first generation than to the much looser spread of second generation theories about a very vague orthodoxy that was the form of classical political economy in the 1830's. Thus classical political economy was left, in its later years, with theoretical positions that were becoming increasingly irrelevant to the analysis of the actual British economy. And eventually the classical .school collapsed. But it is worth reiterating that the "marginal revolution" is only a revolution, a violent overthrow of existing theories, in retrospect. Sidgwick and Marshall did not think that the work of Jevons and Edgeworth overthrew the work of Ricardo, Malthus, and J.S. Mill. Instead, it seemed that Jevons and Edgeworth had created a new set of tools that could be used to analyze a different set of questions, questions in the theory of pure exchange and of value that the classical economists had considered of secondary importance. Sidgwick and Marshall attempted to rewrite political economy using the analytical constructs of both J.S. Mill and W.S. Jevons. The classical economists' ideas of wages, profit, and capital were not overthrown in the marginal revolution. Marshall pronounced that those who followed Thornton in the complete rejection of the wage fund committed an error in one direction greater than the error committed by the holders of the naive wage fund theory in the other.7 The Austrian theory of capital takes the shapeType75fBehindDocument1pWrapPolygonVertices8;6;(0,12019);(19027,12019);(19027,0);(21500,0);(21500,21498);(0,21498)posrelh0posrelv0pib ideas of profit as reward for abstinence and capital as advances to workers as given; it then attempts to sharpen them.8 It was not that the economists of the neoclassical school had better answers than the economists of the classical school. Instead, they had answers to different questions because they had available this new set of marginal analytical tools. The doctrines of the classical economists were not superseded; they were just gradually dropped from economics as attention turned to those questions of choice and price theory that the neoclassical outlook was especially fitted to deal with. Classical political economy failed to adopt a set of theories within its overall analytical framework that would have led it to good answers to the questions of income distribution, long-run evolution, and proper public policy that it asked. And the claim of political economy to be a policy science made this failure particularly serious. The classical economists of the 18S0's were giving advice to those trying to build a better society in l8S0, not in 1800. The claims political economy made to practical applicability required that it not fall too out of touch with the real state of the economy. For the errors made as a result of relying on an outmoded set of models during and after a structural shift were grotesque. McCulloch to the contrary, the costs to the handloom weavers of their "displacement from one occupation to another" were not small. Senior to the contrary, passage of the Ten Hour Bill did not bankrupt the English textile industry or cause rapid capital flight overseas. J.S. Mill to the contrary, more important things could be done to improve the condition of the English working class than -93- teaching them "moral restraint" and their class interest in limiting the population.