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Introduction
Modern microeconomics is focused primarily on the efficient allocation of resources, and its unit of analysis is the individual or the firm while modern macroeconomics is focused primarily on economic stabilization. By contrast, much of the work of classical political economists focused on the progress of the wealth of nations, its nature and causes, and the distribution of this wealth across classes. These issues remain relevant for low and middle income countries today (LICs/MICs) and so I start with the writings of key classical economists to learn their views on why and how nations progressed, one of the two main themes of this book.
Progress of nations is now thought of and referred to as “development,” which addresses both the increase in the means of delivering wellbeing to a population, and the widespread realization of this wellbeing by the population. In addition to these theories of progress, a second theme in development economics pertains to theories of underdevelopment: why nations do not progress. Pertinent to this question are the many theories of colonialism and imperialism from which the heterodox strain of development economics emerged.
In addition to the direct relevance their theories still bear for LICs and MICs, one more reason to start with the classical economists is that they were well known to the pioneering development economists of the 1940s and 1950s, who often used the classical economists as a frame of reference.
Marx is included because, while his work was mostly focused on the critique of capitalism, his writings inspired the radical strain in development economics thought. The review of Marx, like the review of classical scholars in general, is selective. It focuses on presenting those ideas that inspired later thinkers on colonialism and imperialism. Marx’s critique of classical economics and the capitalist system made class and distribution its centerpiece, and the new Marxist and political economic approaches in development economics also drew on this (see Chapter 3).
The reading of classical scholars and the narration of their views is focused, in this chapter, on tracing back the lineage of ideas and lessons that may continue to be relevant in contemporary development economics. The major classical economists pertaining to mainstream development economics thought are Adam Smith, Thomas Robert Malthus, David Ricardo and John Stuart Mill.1 In the critical or radical school of thought, the ideas of Hodgskin, Marx, Hobson, Luxemburg, and Lenin are reviewed mainly with reference to theories of colonialism and imperialism that influenced heterodox development economics.
Mainstream classical political economy key thinkers on the progress of nations
Adam Smith (1723–1790)
Smith drew on prior thought, but was first to synthesize these ideas and present a systematic framework of an economy.2 Smith’s classic The Wealth of Nations (1908) contains five books. Book I is about the causes of the improvement in the productive powers of labor, the key to the prosperity of nations, and how wealth is distributed. Book II is about capital accumulation that entails continued prosperity. In Book III he distinguished between nations that focused on the industry of the country and those that focused on the industry of towns such as arts, manufacturing, and commerce. He contended that the latter lends itself to greater prosperity. In Book IV he reviewed the theories emanating from the policy focus on industry and in Book V he discussed state (sovereign)-society relations and public finance. I draw on portions of Books I–V as they pertain to explaining the prosperity or progress of nations.
Smith started Book I with reference to a “fund” (GDP) that is also referred to as the annual supply or revenue. He theorized that the size of the fund is determined principally by the skill and dexterity of the workforce and the judgment with which it is applied, and by the ratio of active and non-active labor (participation rate). These are central irrespective of other factors like the soil, climate and size of the nation. Smith noted that the division of labor and specialization contributed most to the productivity of the labor force and also distinguished advanced society from the more primitive ones. Because agriculture is by nature limited in the extent to which tasks can be sub-divided, labor productivity in manufacturing necessarily exceeds that in agriculture. Due to the greater potential for division of labor, and the ingenuity of machine makers whose inventions make tasks “easier and readier” (p. 8), time saving is also more likely in manufacturing
The stimulus for making labor more productive is thus the “propensity in human nature – to truck, barter and exchange one thing for another” (p. 10). The scope for such enhancing of labor productivity and producing a surplus for exchange is greater the greater the size of the internal market or access to a broader market via navigation.3
This broader social organization of production is addressed in chapter III of Book II. So far, we learn from Smith that nations progress due to skill and dexterity of the workforce, enhanced labor force participation rates and because higher labor productivity is induced by the division of labor and specialization. Capital facilitates the latter via the invention of machines, which facilitate specialization and constrict the time needed for manufacturing processes. Accumulation thus occurs prior to the division of labor. Subsequent accumulation enables further specialization and prosperity rises proportionately. Capital circulates and transforms itself from money to goods for production and back into money and the circuit makes profit for the employers. For this to occur, nations need tolerable security, otherwise there is an incentive to bury capital for contingencies rather than consume it or employ it for profit (pp. 207–209).
The part of capital that is retained earns a profit and is referred to as fixed. This includes machines, trade instruments, land improvements, and human capital investments via education or apprenticeships. The other part circulates to pay for materials and wages and hence is not retained, but is parted with. Smith also distinguished between two types of labor. The [relative] progress of nations is determined by the part of labor that “adds value to the subject it is bestowed on” such as machinery and materials in manufacturing (p. 253). The other part of labor is not productive and perishes in the moment of performing a service. In this category Smith includes the sovereign and associated splendid court services, the ecclesiastic establishments and the military (p. 254), openly criticizing “great fleets and armies, who in time of peace produce nothing, and in time of war acquire nothing which can compensate for the expense of maintaining them, even while the war lasts.” This criticism reflects Smith’s belief that the prosperity of nations was dependent on a high ratio of productive to unproductive labor.
Smith argued that public prodigality (p. 263) can impoverish great nations by eating into the stock that can be used to hire productive labor. By the same token, nations could flourish as a result of the parsimony or frugality of individuals. Frugality is critical for increasing the fund that hires productive labor and it, rather than industry, is the immediate cause of the increase in capital (p. 260). Smith’s optimistic evaluation was that in great nations, natural progress is maintained by frugality which offsets public extravagance. He asserted that the driving spirit behind this noble conduct was the “uniform, constant and uninterrupted effort of every man to better his condition” (p. 264). Since these motivations are universal, including in primitive societies, the other supportive conditions identified above such as the collective institutional framework must naturally come into play.
The great commerce of any civilized nation is carried on between town and country to the mutual benefit of both. Trade within a nation has the advantage of greater control over and security of capital, but the principle of mutual benefit from trade extends across borders (p. 290). Thus, if a nation can buy a good cheaper from another country, it should be done with some part of the produce of the country’s industry (pp. 346–347).
The power of a country is always in proportion to the value of its annual produce and hence production is privileged (p. 287). Trade he clarifies is “—the symptom of great national wealth but it does not seem to be the natural cause of it” (p. 288). Thus, trade is principally an avenue for surplus. In serving this purpose it would also facilitate the process of capital accumulation. However, Smith insisted that “Those statesmen, who have been disposed to favor it [trade] with encouragements, seem to have mistaken the effect and symptoms for the cause.”
On balance he thought that colonies did add to the prosperity of nations with empires by opening up new markets and enabling additions to productive employment. However, this was despite the negative aspects of maintaining a monopoly on colonial trade, which created distortions in the flow of capital and hence reduced economic diversification (p. 473). In the case of dissension arising, Smith recommended a graceful exit. He believed that only foolish national pride and the personal interests of those administering the colonies, in conjunction with the interests of merchants, perpetuated an unprofitable course of [military] action (p. 480).
An element of Smith’s theory of the state seemed to anticipate Marx. Smith wrote “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against whose whom have none at all” (p. 560). Classical political economists following Smith quibbled or differed with him but all deferred to his genius in having established the framework and agenda for political economy.
Thomas Robert Malthus (1766–1834)
Malthus devoted Book II of his Principles of Political Economy (1951) to the progress of wealth. He viewed politics, security of property, and morals to be primary since without laws and good administration industry would be discouraged (p. 307). But Malthus thought these basic causes were likely to be satisfied in most civilized and prosperous countries, and so he focused on the proximate causes which allowed some countries to surpass others even when the basic causes were satisfied. This is the case even when some among these countries possessed fewer powers of production than others. So he focused his inquiry on “the most immediate and effective stimulants to the continued creation and progress of wealth” (p. 310).
In this regard, Malthus was concerned with countries that had already reached a certain threshold level of prosperity (improved) rather than with the primary causes of prosperity. As was the case with Smith, Malthus noted that structural change occurred when agriculture was very productive since this enabled a large section of the population to move to towns and into manufacturing (p. 335).4 Structural change, along with demand from a growing middle class for “conveniences” and “luxuries,” stimulated prosperity (p. 350).
By questioning Say’s law of supply creating its own demand (p. 316), Malthus raised an issue that is still challenging for high income countries in a globalized world: the optimal level of national saving. Thus, Malthus did not support Say in ruling out a universal glut. While Ricardo accepted Say’s law, arguing that since commodities are exchanged for commodities, and saving is lent and therefore consumed, overall effectual demand should remain constant even if the nature of expenditures may change. Malthus’s rejoinder was that many commodities are exchanged for labor and it is relative to labor that they could lose value when there are market gluts. Since the same produce could command less labor “both the power of accumulation and the motive to accumulate would be strongly checked” (p. 317).
He also argued that the change in expenditure patterns that could accompany increased savings could be instrumental in producing a universal glut since asymmetries in production and effectual demand could result with regard to necessaries and luxuries. Malthus explained that this last point, which was accepted by Ricardo as merely a hypothetical possibility, was in fact the reality (p. 322).
Thus, while Malthus viewed parsimony to be a virtue, he pointed out that capital accumulation per se was not enough if “effectual demand” was lacking. He pointed out that it would be “equally vain” to raise capital accumulation without assured effectual demand as it would be to increase population without assured demand for labor (p. 330). He tried to establish this principle by exploring the reasons for the lack of effectual demand, and how it could explain the limited improvement in New Spain and Ireland as compared to England (pp. 331–351).
He summed up that the three great causes favorable to production were capital accumulation, labor saving inventions and soil fertility but in all cases the continued increase in wealth required adequate demand, domestic or foreign (p. 360). Subsequently, he approached policy analysis through this lens of effectual demand. For example, he advocated for better means of communication as a way to open up internal markets (pp. 361–362). He endorsed external trade as well, but echoed Smith in arguing that the reduction of import duties had to be selective and very gradual to avoid hurting domestic manufacturing (p. 428). Malthus also made a case for land distribution, based on his theory that the continued contribution to effective demand coming from a small number of large proprietors was limited in comparison to the demand generated by a moderate number who would be in “the middle ranks of life” (p. 374).5
Malthus attributed the rapidly growing wealth of the USA to the easy d...
