The history of economic thought is the study of the philosophies of the different thinkers and theories in the subjects that later became political economy and economics, from the ancient world to the present day. This field encompasses many disparate schools of economic thought. Ancient Greek writers such as the philosopher Aristotle examined ideas about the art of wealth acquisition, and questioned whether property is best left in private or public hands. In the Middle Ages, Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price. In the Western world, economics was not a separate discipline, but part of philosophy until the 18th–19th century Industrial Revolution and the 19th century Great Divergence, which accelerated economic growth.
Ancient economic thought (before 500 AD)
Ancient Greece Hesiod active 750 to 650 BC, a Boeotian who wrote the earliest known work concerning the basic origins of economic thought, contemporary with Homer. Of the 828 verses in his poem Works and Days, the first 383 centered on the fundamental economic problem of scarce resources for the pursuit of numerous and abundant human ends and desires.
China Fan Li (also known as Tao Zhu Gong) (born 517 BCE), an adviser to King Goujian of Yue, wrote on economic issues and developed a set of "golden" business rules. Discourses on Salt and Iron in 81 BCE was one of the first recorded debates of state intervention and laissez faire.
Ancient India Hindu texts Vedas (1700–1100 BC) contain economic ideas but Atharvaveda (1200 BC) is most vocal about such ideas. Chanakya (born 350 BC) of the Maurya Empire, authored the Arthashastra along with several Indian sages, a treatise on statecraft, economic policy and military strategy. The Arthashastra posits the theory that there are four necessary fields of knowledge: the Vedas, the Anvikshaki (philosophy of Samkhya, Yoga and Lokayata), the science of government, and the science of economics (Varta of agriculture, cattle, and trade). It is from these four that all other knowledge, wealth, and human prosperity is derived.
Greco-Roman world
Ancient Athens, an advanced city-state civilisation and progressive society, developed an embryonic model of democracy. Xenophon's (c. 430–354 BC) Oeconomicus (c. 360 BC) is a dialogue principally about household management and agriculture. Plato's dialogue The Republic (c. 380–360 BC) describing an ideal city-state run by philosopher-kings contained references to specialization of labor and to production. According to Joseph Schumpeter, Plato was the first known advocate of a credit theory of money that is, money as a unit of account for debt. Plato also argued that collective ownership was necessary to promote common pursuit of the common interest, and to avoid the social divisiveness that would occur "when some grieve exceedingly and others rejoice at the same happenings." Aristotle's Politics (c. 350 BC) analyzed different forms of the state (monarchy, aristocracy, constitutional government, tyranny, oligarchy, and democracy) as a critique of Plato's model of rule by philosopher-kings. Of particular interest for economists, Plato provided a blueprint of a society based on common ownership of resources. Aristotle viewed this model as an oligarchical anathema. Though Aristotle did certainly advocate holding many things in common, he argued that not everything could be, simply because of the "wickedness of human nature". "It is clearly better that property should be private", wrote Aristotle, "but the use of it common; and the special business of the legislator is to create in men this benevolent disposition." In Politics Book I, Aristotle discusses the general nature of households and market exchanges. For him there is a certain "art of acquisition" or "wealth-getting", which is necessary and honourable for one's household, while exchange on the retail trade for simply accumulation is "justly censured, for it is dishonorable". Writing of the people, Aristotle stated that they as a whole thought acquisition of wealth (chrematistike) as being either the same as, or a principle of oikonomia ("household management" – oikonomos), with oikos meaning "house" and with nomos meaning "law". Aristotle himself highly disapproved of usury and cast scorn on making money through a monopoly. Aristotle discarded Plato's credit theory of money for metallism, the theory that money derives its value from the purchasing power of the commodity upon which it is based:
Indeed, riches is assumed by many to be only a quantity of coin, because the arts of getting wealth and retail trade are concerned with coin. Others maintain that coined money is a mere sham, a thing not natural, but conventional only, because, if the users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food. But how can that be wealth of which a man may have a great abundance and yet perish with hunger, like Midas in the fable, whose insatiable prayer turned everything that was set before him into gold?.
Middle Ages
Thomas Aquinas
Thomas Aquinas (1225–74) was an Italian theologian and economic writer. He taught in both Cologne and Paris, and was part of a group of Catholic scholars known as the Schoolmen, who moved their enquiries beyond theology to philosophical and scientific debates. In the treatise Summa Theologica Aquinas dealt with the concept of a just price, which he considered necessary for the reproduction of the social order. Similar in many ways to the modern concept of long-run equilibrium, a just price was just sufficient to cover the costs of production, including the maintenance of a worker and his family. Aquinas argued it was immoral for sellers to raise their prices simply because buyers had a pressing need for a product. Aquinas discusses a number of topics in the format of questions and replies, substantial tracts dealing with Aristotle's theory. Questions 77 and 78 concern economic issues, primarily what a just price might be, and the fairness of a seller dispensing faulty goods. Aquinas argued against any form of cheating and recommended always paying compensation in lieu of service obtained as it utilized resources. Whilst human laws might not impose sanctions for unfair dealing, divine law did, in his opinion.
Duns Scotus One of Aquinas' main critics was Duns Scotus (1265–1308), originally from Duns Scotland, who taught in Oxford, Cologne, and Paris. In his work Sententiae (1295), he thought it possible to be more precise than Aquinas in calculating a just price, emphasizing the costs of labor and expenses, although he recognized that the latter might be inflated by exaggeration, because buyer and seller usually have different ideas of a just price. If people did not benefit from a transaction, in Scotus' view, they would not trade. Scotus said merchants perform a necessary and useful social role by transporting goods and making them available to the public.
Jean Buridan Jean Buridan (French: [byʁidɑ̃]; Latin Johannes Buridanus; c. 1300 – after 1358) was a French priest. Buridanus looked at money from two angles: its metal value and its purchasing power, which he acknowledged can vary. He argued that aggregated, not individual, demand and supply determine market prices. Hence, for him a just price was what the society collectively and not just one individual is willing to pay.
Ibn Khaldun
Until Joseph J. Spengler's 1964 work "Economic Thought of Islam: Ibn Khaldun", Adam Smith (1723–1790) was considered the "Father of Economics". Spengler highlighted the work of Arab scholar Ibn Khaldun (1332–1406) of Tunisia, though what influence Khaldun had in the West is unclear. Arnold Toynbee called Ibn Khaldun a "genius" who "appears to have been inspired by no predecessors and to have found no kindred souls among his contemporaries...and yet, in the Prolegomena (Muqaddimat) to his Universal History he has conceived and formulated a philosophy of history which is undoubtedly the greatest work of its kind that has ever yet been created by any mind in any time or place." Ibn Khaldoun expressed a theory of the lifecycle of civilizations, the specialization of labor, and the value of money as a means of exchange rather than as a store of inherent value. His ideas on taxes were similar to supply-side economics' Laffer curve, which posits that beyond a certain point higher taxes discourage production and actually cause revenues to fall.
Nicole Oresme
French philosopher and priest Nicolas d'Oresme (1320–1382) wrote De origine, natura, jure et mutationibus monetarum, about the origin, nature, law, and alterations of money. It is one of the earliest manuscripts on the concept of money. His treatise argues how money or currency belongs to the public, and that the government or sovereign of the economy has no right to control the value of the currency just so that they can profit from it.
Antonin of Florence Saint Antoninus of Florence (1389–1459), O.P., was an Italian Dominican friar, who became Archbishop of Florence. Antoninus' writings address social and economic development and argued that the state has a duty to intervene in mercantile affairs for the common good, and an obligation to help the poor and needy. In his primary work, "summa theologica" he was mainly concerned about price, justice and capital theory. Like Duns Scotus, he distinguishes between the natural value of a good and its practical value. The latter is determined by its suitability to satisfy needs (virtuositas), its rarity (raritas) and its subjective value (complacibilitas). Due to this subjective component, there cannot only be one just price, but a bandwidth of more or less just prices.
Mercantilism and international trade (16th to 18th century)
Mercantilism dominated Europe from the 16th to the 18th century. Despite the localism of the Middle Ages, the waning of feudalism saw new national economic frameworks begin to strengthen. After the 15th century voyages of Christopher Columbus and other explorers opened up new opportunities for trade with the New World and Asia, newly-powerful monarchies wanted a more powerful military state to boost their status. Mercantilism was a political movement and an economic theory that advocated the use of the state's military power to ensure that local markets and supply sources were protected, spawning protectionism. According to the historian Alex M. Feldman, mercantilism was coefficient with feudalism since the same laws that governed access to land ownership were also those that governed access to bullion ownership, rendering the Roman economy or the Byzantine economy functionally and structurally similar to the roots of the economies of the empires of the Atlantic World and also the economy of the Russian Empire.
Mercantile theorists held that international trade could not benefit all countries at the same time. Money and precious metals were the only source of riches in their view, and limited resources must be allocated between countries, therefore tariffs should be used to encourage exports, which bring money into the country, and discourage imports which send it abroad. In other words, a positive balance of trade ought to be maintained through a surplus of exports, often backed by military might. Despite the prevalence of the model, the term mercantilism was not coined until 1763, by Victor de Riqueti, marquis de Mirabeau (1715–1789), and popularized by Adam Smith in 1776, who vigorously opposed it.
School of Salamanca
In the 16th and 17th centuries the School of Salamanca in Spain developed economic theory, one of the earliest forms of a study in the economic tradition of the field of economics. Even if his doctrine was influenced by the philosophy of Thomas Aquinas, it renewed the economic thought to such an extent that it was defined as "pro-market, pro-hard money, anti-state in many ways, pro-property, and pro-merchant to a surprising extent." There was also the development of an early form of monetarism in response to the introduction of New World gold into the Spanish economy. With their reflexions on Contract law and fairness in exchange, the members of the School of Salamanca were often confronted with the concept of value. Thus observing the effect of American silver and gold arrivals in Spain, namely lessening of their values and augmentation of prices, Martín de Azpilcueta established the idea of a value-scarcity, first form of the quantity theory of money. They also renewed the aquilian concept of just price, which respects the principle of commutative justice but depends on many factors. The just price have a certain latitude because it's not the result of God's will or of labor but of the common estimation of the people (communis aestimatio hominum). On this Luis Saravia de la Calle wrote in 1544:
Those who measure the just price by the labour, costs, and risk incurred by the person who deals in the merchandise or produces it, or by the cost of transport or the expense of traveling...or by what he has to pay the factors for their industry, risk, and labour, are greatly in error.... For the just price arises from the abundance or scarcity of goods, merchants, and money...and not from costs, labour, and risk.... Why should a bale of linen brought overland from Brittany at great expense be worth more than one which is transported cheaply by sea?... Why should a book written out by hand be worth more than one which is printed, when the latter is better though it costs less to produce?... The just price is found not by counting the cost but by the common estimation. However, as Friedrich Hayek has written, the school rarely followed this idea through systematically. His members thought that authorities were sometimes required to intervene and to control prices, especially in monopoly cases or for staples. The opportunity of an economic interventionnism, called arbitrism, wasn't unanimously accepted: if some thought that the prince concerned with public interest is more trustable that greedy merchants, like Domingo de Soto and Tomás de Mercado, others like Luis de Molina, Leonardus Lessius or Juan de Lugo considered that any intervention of the authorities is inopportune owing to the corruption and the clientelism that will be created.
Notable contributors
Sir Thomas More In 1516 English humanist Sir Thomas More (1478–1535) published Utopia, which describes an ideal society where land is owned in common and there is universal education and religious tolerance, inspiring the English Poor Laws (1587) and the communism-socialism movement.
Nicolaus Copernicus
In 1517 Polish astronomer Nicolaus Copernicus (1473–1543) published the first known argument for the quantity theory of money. In 1519 he also published the first known form of Gresham's law: "Bad money drives out good".
Jean Bodin In 1568 Jean Bodin (1530–1596) of France published Reply to Malestroit, containing the first known analysis of inflation, which he claimed was caused by importation of gold and silver from South America, backing the quantity theory of money.
Barthélemy de Laffemas
In 1598 French mercantilist economist Barthélemy de Laffemas (1545–1612) published Les Trésors et richesses pour mettre l'Estat en splendeur, which blasted those who frowned on French silks because the industry created employment for the poor, the first known mention of underconsumption theory, which was later refined by John Maynard Keynes.
Leonardus Lessius In 1605 Flemish Jesuit theologian Leonardus Lessius (1554–1623) published On Justice and Law, the deepest moral-theological study of economics since Aquinas, whose just price approach he claimed was no longer workable. After comparing money's growth via avarice to the propagation of hares, he made the first statement of the price of insurance as being based on risk.
Edward Misselden and Gerard Malynes
In 1622 English merchants Edward Misselden and Gerard Malynes began a dispute over free trade and the desirability of government regulation of companies, with Malynes arguing against foreign exchange as under the control of bankers, and Misselden arguing that international money exchange and fluctuations in the exchange rate depend upon international trade and not bankers, and that the state should regulate trade to insure export surpluses.
Thomas Mun English economist Thomas Mun (1571–1641) describes early mercantilist policy in his book England's Treasure by Foreign Trade, which was not published until 1664, although it was widely circulated in manuscript form during his lifetime. A member of the East India Company, he wrote about his experiences in A Discourse of Trade from England unto the East Indies (1621).
Sir William Petty In 1662 English economist Sir William Petty (1623–1687) began publishing short works applying the rational scientific tradition of Francis Bacon to economics, requiring that it only use measurable phenomena and seek quantitative precision, coining the term "political arithmetic", introducing statistical mathematics, and becoming the first scientific economist.
Philipp von Hörnigk
Philipp von Hörnigk (1640–1712, sometimes spelt Hornick or Horneck) was born in Frankfurt and became an Austrian civil servant writing in a time when his country was constantly threatened by Ottoman invasion. In Österreich Über Alles, Wann es Nur Will (1684, Austria Over All, If She Only Will) he laid out one of the clearest statements of mercantile policy, listing nine principal rules of national economy:
To inspect the country's soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered... All commodities found in a country, which cannot be used in their natural state, should be worked up within the country... Attention should be given to the population, that it may be as large as the country can support... gold and silver once in the country are under no circumstances to be taken out for any purpose... The inhabitants should make every effort to get along with their domestic products... [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares... and should be imported in unfinished form, and worked up within the country... Opportunities should be sought night and day for selling the country's superfluous goods to these foreigners in manufactured form... No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home. Nationalism, self-sufficiency and national power were the basic policies proposed.
Jean-Baptiste Colbert and Pierre Le Pesant, Sieur de Boisguilbert
In 1665–1683 Jean-Baptiste Colbert (1619–1683) was minister of finance under King Louis XIV of France, and set up national guilds to regulate major industries. Silk, linen, tapestry, furniture manufacture and wine were examples of the crafts in which France specialized, all of which came to require membership in a guild to operate in until the French Revolution. According to Colbert, "It is simply and solely the abundance of money within a state [which] makes the difference in its grandeur and power." In 1695 French economist Pierre Le Pesant, sieur de Boisguilbert (1646–1714) wrote a plea to Louis XIV to end Colbert's mercantilist program, containing the first notion of an economical market, becoming the first economist to question mercantile economic policy and value the wealth of a country by its production and exchange of goods instead of its assets.
Charles Davenant
In 1696 British mercantilist Tory Member of parliament Charles Davenant (1656–1714) published Essay on the East India Trade, displaying the first understanding of consumer demand and perfect competition.
Mughal Emperor Aurangzeb Emperor Aurangzeb (r. 1658–1707), ruler of the Mughal India, compiled the sharia based Fatawa-e-Alamgiri along several Muslim scholars which include Islamic economics, whose policies eventually led to the period of Proto-industrialization. It lasted as South Asia's principal regulating body until the beginning of the 18th century.
Sir James Steuart
In 1767 Scottish mercantilist economist Sir James Steuart (1713–1780) published An Inquiry into the Principles of Political Economy, the first book in English with the term "political economy" in the title, and the first complete economics treatise.
Pre-Classical (17th and 18th century)
The British Enlightenment
In the 17th century Britain went through troubling times, enduring not only political and religious division in the English Civil War, King Charles I's execution, and the Cromwellian dictatorship, but also the Great Plague of London and Great Fire of London. The restoration of the monarchy under Charles II, who had Roman Catholic sympathies, led to turmoil and strife, and his Catholic-leaning successor King James II was swiftly ousted. Invited in his place were Protestant William of Orange and Mary, who assented to the Bill of Rights 1689, ensuring that the Parliament was dominant in what became known as the Glorious Revolution. The upheaval was accompanied by a number of major scientific advances, including Robert Boyle's discovery of the gas pressure constant (1660) and Sir Isaac Newton's publication of Philosophiae Naturalis Principia Mathematica (1687), which described Newton's laws of motion and his universal law of gravitation. All these factors spurred the advancement of economic thought. For instance, Richard Cantillon (1680–1734) consciously imitated Newton's forces of inertia and gravity in the natural world with human reason and market competition in the economic world. In his Essay on the Nature of Commerce in General, he argued rational self-interest in a system of freely-adjusting markets would lead to order and mutually-compatible prices. Unlike the mercantilist thinkers however, wealth was found not in trade but in human labor. The first person to tie these ideas into a political framework was John Locke.
John Locke
John Locke (1632–1704) was born near Bristol, and educated in London and Oxford. He is considered one of the most significant philosophers of his era mainly for his critique of Thomas Hobbes' defense of absolutism in Leviathan (1651) and of his social contract theory. Locke believed that people contracted into society, which was bound to protect their property rights. He defined property broadly to include people's lives and liberties, as well as their wealth. When people combined their labor with their surroundings, that created property rights. In his words from his Second Treatise on Civil Government (1689):
"God hath given the world to men in common... Yet every man has a property in his own person. The labour of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property." Locke argued that not only should the government cease interference with people's property (or their "lives, liberties and estates"), but also that it should positively work to ensure their protection. His views on price and money were laid out in a letter to a Member of Parliament in 1691 entitled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money (1691), arguing that the "price of any commodity rises or falls, by the proportion of the number of buyers and sellers", a rule which "holds universally in all things that are to be bought and sold."
Dudley North
Dudley North (1641–1691) was a wealthy merchant and landowner who worked for Her Majesty's Treasury and opposed most mercantile policy. His Discourses upon trade (1691), published anonymously, argued against assuming a need for a favorable balance of trade. Trade, he argued, benefits both sides, promotes specialization, division of labor and wealth for everyone. Regulation of trade interferes with these benefits, he said.
David Hume
David Hume (1711–1776) agreed with North's philosophy and denounced mercantilist assumptions. His contributions were set down in Political Discourses (1752), and later consolidated in his Essays, Moral, Political, Literary (1777). Adding to the argument that it was undesirable to strive for a favourable balance of trade, Hume argued that it is, in any case, impossible. Hume held that any surplus of exports would be paid for by imports of gold and silver. This would increase the money supply, causing prices to rise. That in turn would cause a decline in exports until the balance with imports is restored.
Bernard Mandeville Bernard Mandeville (1670–1733) was an Anglo-Dutch philosopher, political economist and satirist. His main thesis is that the actions of men cannot be divided into lower and higher. The higher life of man is a mere fiction introduced by philosophers and rulers to simplify government and the relations of society. In fact, virtue (which he defined as "every performance by which man, contrary to the impulse of nature, should endeavour the benefit of others, or the conquest of his own passions, out of a rational ambition of being good") is actually detrimental to the state in its commercial and intellectual progress. This is because it is the vices (i.e., the self-regarding actions of men) which alone, by means of inventions and the circulation of capital (economics) in connection with luxurious living, stimulate society into action and progress.
Francis Hutcheson Francis Hutcheson (1694–1746), the teacher of Adam Smith from 1737 to 1740 is considered the end of a long tradition of thought on economics as "household or family (οἶκος) management", stemming from Xenophon's work Oeconomicus.
The Physiocrats and the circular flow
Similarly disenchanted with regulation on trade inspired by mercantilism, the Frenchman Vincent de Gournay (1712–1759) reputedly asked why it was so hard to laissez faire ("let it be"), laissez passer ("let it pass"), advocating free enterprise and free trade. He was one of the early physiocrats, who regarded agriculture as the source of wealth. As historian David B. Danbom wrote, the Physiocrats "damned cities for their artificiality and praised more natural styles of living. They celebrated farmers." Over the end of the seventeenth and beginning of the eighteenth century major advances in natural science and anatomy included the discovery of blood circulation through the human body – documented by William Harvey in 1628. This concept was mirrored in the physiocrats' economic theory, with the notion of a circular flow of income throughout an economy.
François Quesnay (1694–1774) served as the court physician to King Louis XV of France. He believed that trade and industry were not sources of wealth, and instead in his book Tableau économique (1758, Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages, and purchases, were the real economic movers. Firstly, wrote Quesnay, regulation impedes the flow of income throughout all social classes and therefore economic development. Secondly, taxes on the productive classes, such as farmers, should be reduced in favour of rises for unproductive classes, such as landowners, since their luxurious way of life distorts the income flow. (Later, in the early 19th century, David Ricardo showed that taxes on land are non-transferable to tenants according to his Law of Rent.) Jacques Turgot (1727–1781) was born in Paris to an old Norman family. His best-known work, Réflexions sur la formation et la distribution des richesses (Reflections on the Formation and Distribution of Wealth) (1766) developed Quesnay's theory that land is the only source of wealth. Turgot viewed society in terms of three classes: the productive agricultural class, the salaried artisan class (classe stipendice) and the landowning class (classe disponible). He argued that only the net product of land should be taxed and advocated complete freedom of commerce and industry. In August 1774 King Louis XVI appointed Turgot as minister of finance, and in the space of two years he introduced many anti-mercantile and anti-feudal measures, supported by the king. His guiding principles, as given to the king, were "no bankruptcy, no tax increases, no borrowing". Turgot's ultimate wish was to have a single tax on land and to abolish all other indirect taxes, but measures he introduced before that met with overwhelming opposition from landed interests. Two edicts in particular, one suppressing corvées (forced-labour obligations due by peasants to landlords) and another renouncing privileges given to guilds, inflamed influential opinion. He was forced from office in 1776.
Classical (18th and 19th century)
Ferdinando Galiani and On Money In 1751, Neapolitan philosopher Ferdinando Galiani published a nearly exhaustive treatise on money called Della Moneta (On Money), 25 years before Adam Smith's The Wealth of Nations, and therefore is seen as possibly the first truly modern economic analysis. In its five sections, Della Moneta covered all modern aspects of monetary theory, including the value and origin of money, its regulation, and inflation. This text remained cited by various economists for centuries, as wide-ranging a list as Karl Marx and Austrian economist Joseph Schumpeter.
Adam Smith and The Wealth of Nations
Adam Smith (1723–1790) is popularly seen as the father of modern political economy. His 1776 publication An Inquiry Into the Nature and Causes of the Wealth of Nations happened to coincide not only with the American Revolution, shortly before the Europe-wide upheavals of the French Revolution, but also the dawn of a new industrial revolution that allowed more wealth to be created on a larger scale than ever before. Smith was a Scottish moral philosopher, whose first book was The Theory of Moral Sentiments (1759). He argued in it that people's ethical systems develop through personal relations with other individuals, that right and wrong are sensed through others' reactions to one's behaviour. This gained Smith more popularity than his next work, The Wealth of Nations, which the general public initially ignored. Yet Smith's political economic magnum opus was successful in circles that mattered.
Adam Smith's Invisible Hand
Smith argued for a "system of natural liberty" where individual effort was the producer of social good. Smith believed even the selfish within society were kept under restraint and worked for the good of all when acting in a competitive market. Prices are often unrepresentative of the true value of goods and services. Following John Locke, Smith thought true value of things derived from the amount of labour invested in them.
Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. When the butchers, the brewers and the bakers acted under the restraint of an open market economy, their pursuit of self-interest, thought Smith, paradoxically drives the process to correct real life prices to their just values. His classic statement on competition goes as follows.
When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid to bring it thither... The market price will sink...
Limitations
Smith's vision of a free market economy, based on secure property, capital accumulation, widening markets and a division of labour contrasted with the mercantilist tendency to attempt to "regulate all evil human actions." Smith believed there were precisely three legitimate functions of government. The third function was...
...erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain... Every system which endeavours... to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it... retards, instead of accelerating, the progress of the society toward real wealth and greatness. In addition to the necessity of public leadership in certain sectors Smith argued, secondly, that cartels were undesirable because of their potential to limit production and quality of goods and services. Thirdly, Smith criticised government support of any kind of monopoly which always charges the highest price "which can be squeezed out of the buyers". The existence of monopoly and the potential for cartels, which would later form the core of competition law policy, could distort the benefits of free markets to the advantage of businesses at the expense of consumer sovereignty.
William Pitt the Younger William Pitt the Younger (1759–1806), Tory Prime Minister in 1783–1801 based his tax proposals on Smith's ideas, and advocated free trade as a devout disciple of The Wealth of Nations. Smith was appointed a commissioner of customs and within twenty years Smith had a following of new generation writers who were intent on building the science of political economy.
Edmund Burke
Adam Smith expressed an affinity to the opinions of Irish MP Edmund Burke (1729–1797), known widely as a political philosopher:
"Burke is the only man I ever knew who thinks on economic subjects exactly as I do without any previous communication having passed between us." Burke was an established political economist himself, known for his book Thoughts and Details on Scarcity. He was widely critical of liberal politics, and condemned the French Revolution which began in 1789. In Reflections on the Revolution in France (1790) he wrote that the "age of chivalry is dead, that of sophisters, economists and calculators has succeeded, and the glory of Europe is extinguished forever." Smith's contemporary influences included François Quesnay and Jacques Turgot whom he met on a visit to Paris, and David Hume, his Scottish compatriot. The times produced a common need among thinkers to explain social upheavals of the Industrial Revolution taking place, and in the seeming chaos without the feudal and monarchical structures of Europe, show there was order still.
Jeremy Bentham
Jeremy Bentham (1748–1832) was perhaps the most radical thinker of his time, and developed the concept of utilitarianism. Bentham was an atheist, a prison reformer, animal rights activist, believer in universal suffrage, freedom of speech, free trade and health insurance at a time when few dared to argue for any of these ideas. He was schooled rigorously from an early age, finishing university and being called to the bar at 18. His first book, A Fragment on Government (1776), published anonymously, was a trenchant critique of William Blackstone's Commentaries on the Laws of England. This gained wide success until it was found that the young Bentham, and not a revered Professor had penned it. In An Introduction to the Principles of Morals and Legislation (1789) Bentham set out his theory of utility.
Jean-Baptiste Say Jean-Baptiste Say (1767–1832) was a Frenchman born in Lyon who helped popularize Adam Smith's work in France. His book A Treatise on Political Economy (1803) contained a brief passage, which later became orthodoxy in political economics until the Great Depression, now known as Say's law of markets. Say argued that there could never be a general deficiency of demand or a general glut of commodities in the whole economy. People produce things, to fulfill their own wants rather than those of others, therefore production is not a question of supply but an indication of producers demanding goods. Say agreed that a part of income is saved by households, but in the long term, savings are invested. Investment and consumption are the two elements of demand, so that production is demand, therefore it is impossible for production to outrun demand, or for there to be a "general glut" of supply. Say also argued that money was neutral, because its sole role is to facilitate exchanges, therefore, people demand money only to buy commodities; "money is a veil".
David Ricardo
David Ricardo (1772–1823) was born in London. By the age of 26, he had become a wealthy stock market trader, and bought himself a constituency seat in Ireland to gain a platform in the British parliament's House of Commons. Ricardo's best known work is On the Principles of Political Economy and Taxation (1817), which contains his critique of barriers to international trade and a description of the manner in which income is distributed in the population. Ricardo made a distinction between workers, who received a wage fixed to a level at which they could survive, the landowners, who earn a rent, and capitalists, who own capital and receive a profit, a residual part of the income. If population grows, it becomes necessary to cultivate additional land, whose fertility is lower than that of already cultivated fields, because of the law of decreasing productivity. Therefore, the cost of the production of the wheat increases, as well as the price of the wheat: The rents increase also, the wages, indexed to inflation (because they must allow workers to survive) as well. Profits decrease, until the capitalists can no longer invest. The economy, Ricardo concluded, is bound to tend towards a steady state.
Jean Charles Léonard de Sismondi Jean Charles Léonard de Sismondi (1773–1842) was the earliest author of systemic Crisis theory.
John Stuart Mill
John Stuart Mill (1806–1873) was the dominant figure of political economic thought of his time, as well as a Member of parliament for the seat of Westminster, and a leading political philosopher. Mill was a child prodigy, reading Ancient Greek from the age of 3, and being vigorously schooled by his father James Mill. Jeremy Bentham was a close mentor and family friend, and Mill was heavily influenced by David Ricardo. Mill's textbook, first published in 1848 and titled Principles of Political Economy was essentially a summary of the economic thought of the mid-nineteenth century. Principles of Political Economy (1848) was used as the standard text by most universities well into the beginning of the twentieth century. On the question of economic growth Mill tried to find a middle ground between Adam Smith's view of ever-expanding opportunities for trade and technological innovation and Thomas Malthus' view of the inherent limits of population. In his fourth book Mill set out a number