Economics as a science apart from philosophy ,found its
beginnings with the writings of the eighteenth century French
physiocrats, Cantillion, Hume and Smith. What set these writers
apart from their predecessors was their awareness of the economy
as a system, and thus, something to be studied. It is
the "Capitalistic economic system" that economics is based on,
though many economists argue that economics applies to all
systems. Robert Heilbroner takes this at issue in,"The Crisis
of Vision in Modern Economic Thought", and is well worth
reading. The basic image of society at this time was that
rational, well-informed and self-interested agents will exchange
with one another in a society where contracts are kept and
violence and coercion are prevented.
Daniel Hausman in,"The Philosophy of Economics: An
Anthology" expresses classical economics most succinctly,
and as follows:
" The "classical" economists of whom Adam Smith,
David Ricardo, and John Stuart Mill are the most prominent, did
not believe that there was much of general interest to be said
about the preferences of or choices of consumers. Their emphasis
was on production and on the factors that influence the supply of
consumption goods. They regarded agents as seeking to maximize
their financial gains and divided both agents and basic inputs
into production into three major classes: capitalists with their
capital or stocks of accumulated goods, landlords with their
land, and workers with their ability to work. They offered two
main generalizations concerning production. First, they
maintained that all reproducible goods (thus excluding
things like rare paintings) could be produced in any quantity for
the same cost per unit. Except for price fluctuations in times
of crop failures or rapid changes in demand or some other
complications, prices should be determined by costs of
production. Second, classical economists discovered the law of
diminishing returns. if all inputs into production except one
are held constant and the amount of the variable input is
increased, output will increase, but at a diminishing rate. In
particular, unless there is some technological innovation, as
more and more labor is devoted to a fixed amount of land, the
amount that the output increases when an additional laborer is
employed will eventually decline.
Given these laws of production and given the view that higher
wages will cause rapid increases in population, economists in the
early nineteenth century drew gloomy conclusions...With economic
growth, the demand for workers will increase and wages will
temporarily rise. But the higher wages will increase the
population of workers. The increased number of workers will need
more food. Farm land will have to be cultivated more intensively
or less fertile land will have to be brought into use. Either
way, the proportional return (rate of profit) on the additional
investments will be lower. But,, except temporarily or as a
compensation for greater risks or unpleasantness, there cannot be
unequal rates of profit in different employments of capital.
Capitalists will not invest in growing more food unless they earn
the same rate of profit there is elsewhere. Landlords will be
able to increase rents, and the rate of profit throughout the
economy will decline to the rate of profit in marginal
agricultural investments. Ricardo argues that eventually the
rate of profits will decline to the point where it is no longer
worthwhile for capitalists to invest at all. In the resulting
stationary state", there are more workers, but they are no better
off than their predecessors. Capitalists have not benefited from
economic development either, since they wind up scarcely better
off than the workers with minimal returns on their investments.
Only landlords, who do nothing but sit on their land, are
winners. There is, in the view of most classical economists,
little to do about this gloomy prospect except to agitate for the
elimination of tariffs impeding to importation of foodstuffs and
to preach "restraint" to the working class." In conclusion, the
classical economists greatly underestimated the ability of
technology to stave off diminishing returns.
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