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for him, in the end, everything that nourished humans came from the earth.
unlike humans, Nature actually produced new things: grain out of small seeds for food, trees out of saplings and mineral ores from the earth from which houses and ships and machinery were built. By contrast, humans could not produce value. They could onl...
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Quesnay called them the ‘productive class’. By contrast, he thought that nearly all other sectors of the economy–households, government, services and even industry, lumped together in the lighter blob–were unproductive.
Developing his classification of productive and unproductive work, Quesnay grouped society into three classes. First came farmers and related occupations working on the land and water; according to Quesnay, this was the only productive class. Next were manufacturers, artisans and related workers who transform the materials they receive from the productive class: wood and stone for furniture and houses, sheep’s wool for clothing and metals from the mines for tools.15 Yet, argued Quesnay, this class did not add value; rather, their work merely recirculated existing value. The third class was the
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value extraction by the unproductive members exceeds value
creation by the productive members, growth stops.
contemporary A. R. J. Turgot retained the notion that all value came from the land, but noted the important role of artisans in keeping society afloat. He also recognized that there were other ‘general needs’ that some people had to fulfil–such as judges to administer justice–and that these functions were essential for value creation.
As farmers move from tilling the land to employing others, he argued, they remain productive and receive profits on their enterprise. It is only when they give up on overseeing farming altogether and simply live on their rent that they become ‘disposable’ rent collectors.
Economists started to measure the market value of a product in terms of the amount of work, or labour, that had gone into its production. Accordingly, they paid close attention to how labour and working conditions were changing and to the adoption of new technologies and ways of organizing production.
Another enormously influential book, Ricardo’s On the Principles of Political Economy and Taxation, first published in 1817, contained a famous chapter called ‘On Machinery’, in which he argued that mechanization was reducing demand for skilled labour and would depress wages.
Smith, Ricardo and others of the time became known as the ‘classical’ economists. Marx, a late outrider, stands somewhat apart from this collective description.
The classical economists redrew the production boundary in a way that made more sense for the period they lived in: one which saw the artisan-craft production of the guilds still prominent in Smith’s time give way to the large-scale industry with huge numbers of urban workers–the proletariat–that Marx wrote about in the third quarter of the nineteenth century.
they would have found odd the idea, widespread today, that economics is a neutral technical discipline which can be pursued in isolation of the prevailing social and political context.
value derived from the costs of production, principally labour; and that therefore activity subsequent to value created by labour, such as finance, did not in itself create value.
Explaining the immense increase in productivity that occurred when one worker was no longer responsible for producing an entire pin, but only for a small part of it, Smith related how the division of labour allowed an increase in specialization and hence productivity:
Equally significant was Smith’s analysis of how the ‘market’ determines the way in which consumers and producers interact. Such interaction, he contended, was not down to ‘benevolence’ or central planning.21 Rather, it was due to the ‘invisible hand’ of the market:
Smith launched a more general attack on mercantilist policies which, he argued, restricted competition and trade.
increase savings, and hence the amount of capital available for investment rather than unproductive consumption
Manufacturing labour, not land, was the source of value.
Smith has become the figurehead of much modern economic theory because of his ideas about how capitalism is founded on supposedly immutable human behaviour, notably self-interest, and competition in a market economy.
He felt that the enemies of growth were, first, the protectionist policies of mercantilists; second, the guilds protecting artisans’ privileges; and third, a nobility that squandered its money on unproductive labour and lavish consumption.
His positioning of government on the ‘unproductive’ side of the boundary set the tone for much subsequent analysis and is a recurring theme in today’s debates about government’s role in the economy, epitomized by the Thatcher–Reagan reassertion in the 1980s of the primacy of markets in solving economic and social issues.
This is where Smith addressed head-on how the wealth of nations could grow. It was in effect his policy advice. Instead of ‘wasting’ the surplus on paying for unproductive labour, he argued, it should be saved and invested in more production so that the whole nation could become richer.
Indeed, Smith asserted, the principle of rent from land could be extended to other monopolies, such as the right to import a particular commodity or the right to plead at the bar. Smith was well aware of the damage monopolies could do.
more than that, it was one of the proximate causes of the Civil War, which led to the execution of Charles I. Many Englishmen understood what Smith meant when he said that a free market was one free of rent.
made his book a hit among the ‘free traders’ who eventually overturned England’s Corn Laws, which imposed heavy tariffs on imported corn to protect domestic landowners, and other protectionist measures.
Following Smith, free traders could trace value to labour, and the logic of value was thereby inverted. Gold, like all other things, was valued by how much labour it took to produce.
in particular, whether the provision of services in themselves created value.32
Adding value in any branch of production is productive; not adding value is unproductive.
Other of Smith’s ideas, such as free trade and the unproductive nature of government, have also left an enduring legacy.
concerned with something that he felt was glaringly absent from Smith’s theory of value: how that value was distributed throughout society–or what we would today call income distribution.
Ricardo, by contrast, felt that the distribution of wages was, as he stressed in his magnum opus On the Principles of Political Economy and Taxation, the ‘principle problem’ in economics and ultimately regulates the growth and wealth of a nation.
food comes from agriculture, so the price of food regulates wages: a low price of food (or ‘corn’, as Ricardo wrote in the language of the day) will permit lower wages and therefore higher profits and incentives to invest in future production (for example in manufacturing) and promote economic growth. A high wage due to low productivity in agriculture will mean lower profits, and hence little investment in future production, which in turn leads to slower economic growth.
inherited this ‘dismal theory’ of wages from his contemporary Thomas Malthus
Profits are the residual from the value that workers produce and do not need to consume for their own ‘maintenance’, as Ricardo put it, ‘to subsist and perpetuate their race’.
As profits grow, so capitalists invest and expand production, which in turn creates more jobs and raises wages, thereby increasing the population, whose wages finally go back to subsistence level, and so on.
Production in agriculture depends on two types of input: goods and services needed for production. One type can be scaled–increased in proportion to requirements. It includes labour, machinery, seeds and water. The other type cannot be scaled: good arable land. As Mark Twain is supposed to have said, ‘Buy land, they’re not making it any more.’
Ricardo defined rent as a transfer of profit to landlords simply because they had a monopoly of a scarce asset.
Correspondingly, the wage share going to manufacturing workers would rise. But the extra wages would have to be spent on food, which was more expensive because landlords were charging higher rents. As a result, much of the nation’s income would ultimately go to landlords.
Ricardo’s theory was so convincing that it is, in essence, still used today in economics to explain how rents work.39 Rents in this sense could mean a patent on a drug, control of a rare mineral such as diamonds, or rents in the everyday sense of what you pay a landlord to live in a flat.
Ricardo’s gloomy picture of economic stagnation is relevant to a modern debate: how the rise of the financial sector in recent decades and the massive rents it earned from speculative activity have created disincentives for industrial production.
To ‘rebalance’ the economy, the argument runs, we must allow genuine profits from production to win over rents–which, as we can see here, is exactly the argument Ricardo made 200 years ago, and John Maynard Keynes was to make 100 years later.41
It helped to persuade Britain to abolish the Corn Laws in 1846 and embrace free trade, which diminished the power of big vested interests and allowed production costs, rather than embedded monopoly and the privileges that went with it, to govern production.
brought about a political transformation as well as an economic one: it tipped the balance of power away from aristocratic landlords and towards manufacturing as the nineteenth century wore on.
His villains are those ‘who do not reproduce’–the landed nobility, the owners of scarce land who charge very high rents and appropriate the surplus.44 For Ricardo, capitalists would put that surplus to productive use, but landlords–including the nobility–would waste it on lavish lifestyles.
Ricardo parted company from Smith because he was not concerned about whether production activities were ‘material’ (making cloth) or ‘immaterial’ (selling cloth).
Ricardo singled out government as the ultimate example of unproductive consumption. Government, in his view, is a dangerous leech on the surplus.
He found to his relief that the increase in value production by private companies more than compensated for the increase in unproductive government consumption. Unlike Smith, Ricardo did not write about that part of government expenditure which creates the conditions for productivity in the first place: infrastructure (bridges, roads, ports and so on), national defence and the rule of law.
Born in 1818, Marx grew up in the German city of Trier, one of nine children of Jewish parents, both lawyers. In his own legal studies at university, Marx was drawn to a critical version of Hegel’s philosophy of dialectics, propounded by Hegel’s disciples, which set out how intellectual thought proceeds via negation and contradiction,
despite being opposed to capitalism, he analysed it objectively in order to understand where it was taking humankind and what the alternatives might be.
