[5th

December 2016]

A History of Economic Thought (1938)

By Eric Roll

Review of Chapter-3

“The Founders of Political Economy”

by

Shoeb Ahmed

CENTRE FOR ECONOMIC AND SOCIAL STUDIES Begampet, Hyderabad - 500016, Telangana, India.

[ C E N T E R F O R E C O N O M I C A N D S O C I A L S T U D I E S , N I Z A M I A H O B S E R V A T O R Y ,

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The Founders of Political Economy

Introduction

This review work focus on eighteen century development of modern industrial capitalism and its

theory embodied in the works of classical economists. This review enlighten the works of

Machiavelli, Bodin, Bacon, Thomas Hobbes, Petty, John Locke, Sir Dudley North, John Law,

David Hume, Richard Cantillon, Sir James Steuart, Physiocrats like Quesnay and Turgot.

Present review focus on Eric Roll great emphasis on three streams of thought, which go along

with the transition from commercial to industrial capitalism and together with that economic

development, which help to shape the classical theory.

Streams of thoughts:

1. Philosophical: The development of economic thought from its canonical origin to philosophic

radicalism.

2. Progress of English economic thought from the later mercantilist.

3. Physiocratic system, the French origin developed by number of thinkers in the eighteen

century France.

In review of political thought, emancipation from theology is more radical as freeing of thought

from dominance of church authority as it was evident that economic activity was carried out with

influence of theological laws. Political thinker like Bodin who was also concerned with

emancipation said “the relation of man to man, instead of the relations of man with god, the

foundation of social enquiry”.

Machiavelli

The main impact of new modes of thought was on theory of state and its foremost influence was

on Machiavelli, who was able to notice the decay of medieval society and gave new direction to

new method of approach to social and political questions. Machiavelli studied the actions of

wise prince and said that “necessity not virtue” to be the guide.

Machiavelli was guilty off many errors which are as follows:

i. He had little idea of the complex forces which fashion history.

ii. To him social development was exclusively the work of great men.

iii. His protest against the ethical was immense which could lead strong reaction.

iv. He minimized the power of traditional ideas of right conduct, and thought exclusively in

terms of the princes of Renaissance.

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v. He did not envision the rise of a new, non-theological, ethical discipline which can

influence economic thought.

Eric Roll thinks Machiavelli influence was immense, in spite of initial opposition and concludes

that social philosophy was based upon a rational and positive foundation.

Bodin

Bodin was impressed with problem of authority which the decay of church power, the religious

wars and the struggle of conflicting civil units had raised. Bodin laid the foundation for “theory

of the need” for a central sovereign authority in his book Les Six Livres de la Republique

(1576). He pleaded for the modern sovereign state which has to be source of all law and order.

Bodin was also conscious of the danger of unrestricted authority. Bodin thought divine law and

natural law should prescribe the broad limits of the state’s power. He emphasized on the rights

of private property and beneficence of free trade, which he sensed a possible antithesis between

state and society and was probing for theory which could give ‘some place for the consent of

subjects to the actions of authority’. Eric Roll concludes that Bodin was forerunner of liberalism

in direct sense than the natural-law philosophers of the seventeen century.

Bacon

Bacon laid philosophical foundations for experimental science and he carried the method of

rational inquiry from the natural sciences to the study of man and his community. Bacon gave

the philosophical imprimatur to the authority of the state. His eulogies of the monarch sincerely

reflect his fundamental belief in the secular authority. Bacon thought monarchy as natural

institution and obedience to it as natural duty. He upheld the doctrine of the divine right of kings

and gave absolutism a powerful theoretical support.

Eric says absolute sovereign was assigned the role of supreme judge, who would not be fettered

by prejudice or laws and who would stand above the social factions. There was transition in

authority from shattered feudal system and political quintessence of age.

Thomas Hobbes

He was Bacon’s companion and gave more powerful interpretation to Bacaonian ideas on the

principles of sovereignty of the state. He stressed on coercion as essential element of state

organization and based his analysis on voluntary association of individuals who agreed that one

or more of their number should represent their common will. He says any ruler, lawful or

otherwise was possessed of the fundamental attributes of kingship. Hobbes worked in the

direction of religious emancipation and he was regarded as a foe of belief by his contemporaries.

Hobbes given a theoretical basis to the claims of usurpers of sovereignty, church and king were

united in opposing him. Hobbes disregarded laws and respect for indivisible and unrestricted

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sovereignty. Hobbe’s belief in power above the conflicting interests of social classes was both

his weakness and his strength. Hobbe’s importance in growth of new society and its thought was

considered very great and his basis was individualist and he recognize the individual impelled by

self interest as the unit from which to start. Hobbes’s Leviathan was based on this self interest.

Eric says, in spite of central doctrine of state authority and logical development of the principle

immanent in Hobbes system, utilitarianism philosophy begin to progress.

Petty

He was English economist and prepared ground for classical system. Founder of political

economy and free from mercantile interest. He wrote his first book Political Arithmatic in 1672

and published it in 1690. Petty adhered to manifesto of empiricism and he play important part in

laying foundation to statics. He has shown the ways of data collection and also wider functions

of statical inquiry. His main work “A treatise of taxes and contributions (1662), verbum Sapienti

(1664), in political Anatomy of Ireland, written in 1672 and published in 1691. In Sir William

Quantulumcumque concerning money, written in 1682 and published 1695.

Petty’s approach to economic problems distinguishes him sharply from classical and modern

economist. Petty shared Hobbes political philosophy and adopted indirect approach to important

economic problem wealth and value was itself an expression of the changes in social and

political relations that had taken place as an indispensable part of evolution of industrial

capitalism.

In the book “Treatise on Taxes”, Petty discussed source of public revenue, forms of public

expenditure and best means of raising the revenue and distributing it to others. In his theory of

public finance, he agrees with mun on taxation as inevitable, Petty urged economy in running of

state, main services, defense administration and he condemns expensive wars and maintenance

of supernumeraries and supported expenditure of public money in order to provide for those

would otherwise be unemployed, as they lose their faculty of laboring. On determinants of

states, he recognized individual self interest and high

He realized that people were not always ready to recognize utilitarian nature of taxation, as

people refuse to pay tax and think king is extravagant or they were unjustly assessed compared

with their fellow tax payers. From above arguments, Petty was intrinsically motivated into

economic analysis and examined different ways in which taxes can be levied.

Petty theory of value is contained in short digression on rent, which follows his theory of rent-

tax, in a discussion of real and political price of commodities at a latter point in his treatise and

also in some remarks on wages in political anatomy of Ireland. Labour, he said is the father and

active principle of wealth, as lands are the mother.’

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Petty’s analysis of value and price, led to the question of “what is the mysterious nature of rents”

and he answered that the natural and true rent of piece of land for any particular year is the

difference between the proceeds of the harvest and the seed plus what the producer ‘himself hath

both eaten and given to others in exchange for clothes and other natural necessities, which

explains origin of surplus and value’. Petty focusing on production from the land emphasized

that surplus product of labour and labour power to create a surplus above its own sustenance.

Petty knows rent was only surplus and think of profit in it and he argued that rent was

determined by price and not vice versa. Petty was having confusion between exchange value and

use-value.

Petty theory on capitalization of rent or the ‘usus fructus per annum’ focused on computation

of value of land at twenty-one years purchase of its annual rent. Petty thought money and foreign

trade are important as they help country to develop and improve its industry. He expects country

should Endeavour by policy to improve its efficiency in the production of its commodities

needed for trade. He thinks ‘art’ as an important aid in production and he measured the power of

the prince by the number, art and industry of his people, well united and governed.

In Quantulumcumque, he discussed monetary matters and suggested that money is only needed

as a help in trade and industry and also gave a commutation of the amount of money needed in

which the concept of velocity of circulation was implied. He raised objections to the prohibition

of bullion exports and to the legal regulations limiting interest and exchange rates. Petty was not

happy with existing laws at his time and he thinks that laws were against the laws of Nature and

also impracticable. He has strong belief in England’s ability to capture the trade of the world. He

said’ in England materials for a bank which shall furnish stock enough to drive the trade of the

whole commercial world’- Expectation of Petty was latter fulfilled.

John Locke

John Locke is the economist of transition from mercantilism to the classics and immediate

follower of Petty. Locke was largely influenced by mercantilist notions. The appearance of

Locke’s philosophy at the end of the seventeenth century has shown change of economic policy

which was less rapid than that of political philosophy.

Locke has synthesized and carried further all elements of past thought like social contract which

in Plato had made men build the city, in ‘Hobbes summit to the Leviathan’, and in Bodin had

established and set the limits to central authority, is found again in the work of Locke. He

developed doctrine of natural law. Realization of self-interest as the inherent motive force of

conduct is found entirely in Locke’s philosophy. Locke observed orderly voluntary association

of merchants in commercial ventures in regulated companies appeared to him the natural form of

organization for purpose of government. In constitutional monarchy that rationalism found its

political expression. Locke thought freedom must only be restricted in the interests of preserving

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it. Its basis was property, acquired by industry and reason, and entirely to the security which the

state could give. Locke insisted that a country grew rich by exporting more than it imported.

Locke took some points in Petty’s theory of rent, interest, money and debasement. He gave very

good analysis of the effect of debasement on prices in his some considerations of the

consequence of the lowering of interest and raising the value of money (1691). Locke also

opposed the laws for the limitation of interest. Locke followed closely petty in deriving theory of

interest from an analysis of rent. He regarded rent as the only surplus and inquired how money,

which was by nature barren, could have some productive character as soil, which did produce

something useful. He concluded that, “unequal distribution of money enabled its owners to

obtain a tenant for it from whom they could receive interest”.

Locke’s “Two Treatises concerning Government” (1690), share petty’s views of the origin of

value. He expressed that earth belonged to all men in common and private property was justified

by in so far as human being had mixed his labour with the gifts of nature. He considered labour

as the main source of value and whole value of the products of soil was due to labour, the rest

was assumed as natural gift. Locke confined to use-value and to have endeavored to show

importance of labour in its production. He avoided the issue of the origin of exchange –value and

made analysis which has been classed as a supply and demand theory of price. This analysis

appears in the Consequences, but is prefaced by a statement on money in Government.

According to Locke, money has imaginary value which was created by common consent.

In the consequences, Locke gave money double value. One arises from the ability of money to

supply a yearly income and the other for meeting necessaries or convenience of life which

money can procure in exchange. Locke felled into the mercantilist error of identifying money

and capital. Locke’s emphasis on the medium of exchange function of money was based on the

quantity theory of money, which was outlined with problem of debasement. Locke viewed that

changes in amount of money were bound to affect the prices and prices are determined by the

amount of money in circulation. This view of Locke was based on a supply and demand theory

of price. Locke believes that any quantity of money might be enough to carry on the trade of a

country. Locke pursued interest as consequence, and not as a cause, of the amount of money

seeking employment.

Sir Dudley North

He is immediately follower of Petty and advocate of free trade of his time. In his book

“Discourses upon Trade” (1691) took up a stubborn free trade attitude. He emphasized that all

trades are profitable because no one would continue in an unprofitable occupation. North also

took up some points of Petty’s theory on rent, interest, and money. North called capital as stock

and said little on subject of value, though he discussed price.

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North says that the rate of interest would fall if there were more lenders than borrowers. A low

rate of interest did not make trade, on the contrary, with an increase in trade the volume of

money would increase and the rate of interest would fall. North adopted the view of Mun’s

distribution of the precious metals through international trade. He said that the amount of money

brought from foreign countries or mined at home, anything in excess of the requirements of trade

was nothing more than an ordinary commodity to be treated as such.

John Law

Law was famous businessman than as an economist. He made contribution to theory of money

and he did not believe that paper money was equivalent to metallic money, but he believed that

money has active power and its good supply of it was necessary in order to create employment.

He contributed to the creation of conducive condition, which inspired physiocratic thought. He

desired that state should have ‘stock of treasure’. Law was the founder of a ‘subjective theory of

value’, with special reference to the value of money and rejected the idea of money having an

imaginary value. The service which it rendered as money was no different from other services or

from the service of any other commodity. He became the forerunner of the Austrian school.

David Hume

Hume’s Political Discourses (1752), he included a number of economic essays of which of

money, Of Interest, Of Commerce and Of the Balance of Trade are given importance. He

repeated mercantilist errors. His praise of the merchants as ‘one of the most useful races of men

and as the motive force of production sounds strange after the writings of Petty, Locke and

North. He urged the desirability of treasure and uses of money in stimulating trade. On the

quantity theory of money, he based the belief that the balance of trade argument was wrong,

because the movements of specie would affect the price and merchandise trade. Hume ranged

himself on the side of free traders, but his advocacy of free trade was no stronger than that of

North.

In ‘Theory of Money’ he view that prices are determined by the amount of money. In ‘Theory of

Interest’, he opposed Locke’s view in certain aspects. Like Locke he regarded the value of

money as fictious only. Hume drew no distinction between changes in the value of the money

commodity itself and changes by an increased volume of circulating money. Hume believed that

the prices of commodities would always be proportioned to the quantity of money. The absolute

quantity of the latter did not therefore matter: a point which he demonstrated in a ‘celebrated

illustration’. Hume thought that changes in the quantity of money were of importance, as they

could alter the habits of people. Prices might not change if the changes in the amount of money

were accompanied by alterations in habits, which affected the volume of trade and demand for

money. Hume described what Keynes later called a profit inflation, which was taking place at the

expense of labour.

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Hume’s essay on ‘Of Interest’ suggests that a low rate of interest was the surest sign of

flourishing state of country trade. He showed low interest was not a cause but an effect. Rejected

Locke’s view on low rate of interest, which was due to abundance of money, although he

admitted both can occur together. Among the factors which determined the rate of interest he

distinguished the supply and demand of borrowers and lenders. A high rate of interest is caused

by ‘a great demand for borrowing’ and ‘little riches to supply that demand.’ Following North’s

view of the profit creating quality of capital, Hume added a third determinant of rate of interest.

Hume regarded profits and interest as independent. He viewed landed interest and desire for

accumulation as the driving forces of economic activity in his time helped to consolidate the

forces that were on the point of achieving economic supremacy and gained much political power.

Richard Cantillon

“Essai sur la nature du commerce en general” (1755) present’s most systematic statement of

economic principles, before the ‘Wealth of Nations’. Cantillon faced no difficulties in presenting

mechanism of foreign payments. His hypothesis on increase gold output from mines will

increase the power of purchasing was well accepted. He was aware of effects of increase of

money commodity and those of paper money. He showed relation between merchandise trade,

speculation and specie movement and he also showed their interaction with exchange rates and

price-levels in the mechanism of international payments. Cantillon has well-articulated the

causes which raise or lower the exchange from parity and the way in which such movements can

be foreseen and discounted. Cantillon ‘Theory of Value’ is in origin a labour theory but it is

transformed into a ‘Cost of Production Theory’ and admixture of supply and demand theory.

Cantillon distinguishes between the intrinsic value and the fluctuating price at which goods are

sold in the market. He assumed the excess of supply over demand depress the market price

below the intrinsic value, which never alter. As it is impossible to allocate production among the

different commodities in perfect harmony with consumption, hence variation in market price

exists. He rejects the definition which gives money an imaginary value. He emphasized on the

difference of wages in different occupation.

Sir James Steuart

His work “Principles of Political Economy’ published in 1767, became standard guideline for

comprehensive treatises. He distinguished between positive profit and relative profit. Positive

profit did not cause any one any loss and it derived from general increase in labour, industry, and

skill and it gets added up to the public good. Whereas, relative profit represents only a vibration

of balance of wealth between parties; it did not add to the existing volume of stock.

Steuart developed a ‘Cost-of-Production’ theory of value and he distinguished between the real

value of commodities and the profit upon alienation obtained in their sale. Real value is

determined by three factors: First, the amount of it which a workman could on average produce

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in a given period of time. Secondly, by the value of workman’s subsistence and necessary

expense, both for supplying his personal wants and providing the instruments belonging to his

profession and thirdly, by the value of materials, that is the first matter employed by workman.

Given by above three amounts, the real value of a good is determined. Anything above is the

profit of the manufacturer and depends on the condition of supply and demand.

Above analysis has twofold significance. Firstly, it makes manufacturer profit arise only in

exchange and thus represents a consistent application of the mercantilist theory of surplus.

Secondly it leads Stuart to develop a ‘supply and demand’ theory of price, which was elaborate

for his time.

PHYSIOCRATS

Physiocracy was developed in France in the eighteenth century. Political philosophy of the

physiocrarts was logical development of their economic ideas. The division of labour, one

producing surplus and other being sterile is found in whole classical system and defining

productive labour was important subjects discussed by Adam Smith and Ricardo. Physiocrats

tried to discover the actual form of productive labour. They were unable to distinguish use-value

and exchange-value. They thought surplus as the difference between use-values which has been

consumed and those which has been produced. They thought produit net was not a surplus of

social wealth in terms of exchange-value, but of concrete material wealth of useful goods.

Physiocrats concentrated on agriculture and were able to ignore problem of exchange-value

altogether. The analysis of the circulation of produit net between different classes of society

forms the most spectacular part of physiocratic doctrine.

Quesnay

Quesnay’s ‘tableau economique’ showed that how produit net circulates between proprietors of

land, tenant farmers and sterile class and secondly how it is reproduced each year of the same

produit net.

Turgot

He introduced dualism into theory of price and value and considered produit net in its most

primitive form. Other than believing only labour in agriculture could create a surplus, he also

gave importance to subjective elements in the determination of exchange-value. Turgot made a

list of different factors which an individual took into account in forming judgement about a

particular good. Its ability to satisfy a want, the ease with which it could be obtained, its scarcity

and other considerations would together form what he called the ‘valuer estimative’ of a good.

From this exchange value was derived. Turgot called it ‘valeur appreciative’ and said it was

determined by the average of the valeurs estimative of the parties to the exchange. He provided a

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link between exchange-value theory and theory of the function of labour. He said individual

would apply portions of his labor to obtain goods he needed according to his valuation of them.

Physiocrats were inconsistent in explaining value, as they made labour the exclusive creator of

surplus; they thought value as use-value only. Single tax on the land was the financial maxim of

physiocracy. According to physiocrats, human society was ruled by the natural laws which could

never be altered by the positive laws of statecraft. The essential aspects of the natural order were

the right to enjoy the benefits of property, to exercise one’s labour, and to have such freedom as

was consistent with freedom of others to follow their self-interest. Supporters of physiocrats saw

them as defenders of feudalism, but on economic front, physiocrats are forced to look economic

problems through capitalist glasses, as for them owner of the land is capitalist who employed the

labourer. Physiocrats prepared the ground for the French Revolution.