Classical Economics, Lecture 1 with David Gordon - Mises Academy

Classical Economics, Lecture 1

J.B. Say and His Followers

Rothbard’s Perspective

• Rothbard opposes what he sees as an older standard view of economic history.

• In this view, economics began with Adam Smith, The Wealth of Nations. (1776)

• Before Smith, economics didn’t really exist. Smith refuted the fallacies of the mercantilists.

The Older View

• After Smith, there were a succession of great figures: David Ricardo, John Stuart Mill, the marginalists ( Menger, Jevons, and Walras), Alfred Marshall, and Lord Keynes.

• A problem for people who hold this view is who follows Keynes?

Rothbard Rejects the Older View

• Rothbard rejects this view of economic history.

• He says it is a Whig Interpretation of History. This expression comes from Herbert Butterfield. In the Whig Interpretation, things are always getting better until we reach the present.

The Whig Interpretation

• Applied to economics, the WI holds that knowledge has continually increased.

• What are Rothbard’s criticisms of the WI?• Knowledge can be lost. Rothbard thinks that basic

knowledge of value theory was lost after Adam Smith.

• Rothbard was very much influenced by Thomas Kuhn, The Structure of Scientific Revolutions (1962).

Rothbard and Thomas Kuhn

• Rothbard accepts Kuhn’s view of competing paradigms. Different scientific theories have fundamentally different assumptions. A new theory isn’t the old theory + improvements.

• Rothbard disagrees with Kuhn about whether a paradigm is better than the one it replaces. Rothbard does believe you can say this. He thus accepts progress in economics.

Another Rothbard Criticism

• Rothbard also criticizes the older view because it concentrates on just a few great thinkers.

• He says that a history of economic thought has to concentrate not just on the top figures, but less important members of each economic school as well. Rothbard was influenced by Quentin Skinner here.

A Problem for Rothbard

• Rothbard wants to downplay the importance of Adam Smith in favor of the French tradition of Turgot and Cantillon. ( He was Irish but spent a great deal of time in France.) This tradition stresses utility rather cost of production, as Smith did.

• Say fits into Rothbard’s picture; he was a French theorist who stressed utility. But he considered himself a follower of Smith. How can this be made consistent with Rothbard’s account?

Rothbard’s Solution

• Rothbard says that the French economists associated the French economic tradition with the physiocrats.

• The physiocrats were discredited because they supported absolute monarchy. Also, they held implausible views, e.g., that only agriculture was productive.

• Despite calling himself a Smithian, Say had many criticisms of Smith. E.g., he said that Smith was not systematic.

Say on Method

• Say’s most important book was his Treatise (Traité), which was published in 1803.

• He was the first economist to write explicitly about economic method.

• Rothbard thinks that he anticipated praxeology, the science of human action.

• Say first asked, is economics an empirical science? That is, does it deal with the real world? He answered that it does.

Method Continued

• He criticized the physiocrats and also David Ricardo for introducing arbitrary axioms that weren’t true.

• This is a point that is often missed when studying praxeology. People sometimes ask, how do we know that the deductions about the concept of action apply to the actual world? The answer is that actions occur in the real world.

More Method

• Say distinguished between general and variable or particular facts. Economics is concerned with general facts, These are always the same. They don’t require testing but can be reasoned about deductively.

• Mathematics isn’t suited for economics. There are too many variable events that help determine each particular economic fact for mathematical or statistical analysis to be useful.

Theory Versus Facts

• Because there are so many variables involved in each particular economic event, you can’t explain what happens without appealing to an economic theory.

• It’s wrong to argue, e.g., that prosperous nations often have followed a high tariff policy, so tariffs cause prosperity. We need a theoretical account to establish this: otherwise it is just a statement that tariffs accompanied prosperity.

Theory Versus Facts Continued

• It might have been the case that the country would have done better with free trade.

• In fact, we have good theoretical reasons to think this; free trade increases the extent to which the division of labor can operate. Say emphasized the importance of the division of labor, and did so with more insight than Smith.

Exchange

• In contrast with Smith’s stress on cost of production, Say explained prices through the appeal to the utility of the consumer. Prices depend on what consumers want.

• Say realized that the utility of a good to a consumer is relative to how he ranks other goods. He didn’t have the concept of marginal utility, though, and thus he couldn’t fully solve the diamond-water paradox.

Exchange Continued

• Say did not think that in an exchange, each person values what he gets more than what he gives up.

• He wrongly thought that an exchange takes place when the goods exchanged are of equal value. He should have asked, “equal to whom?”

• There is a typo on p.20 that destroys the sense of the sentence in which it occurs. ¶ 2, line 4: “But Condillac insists. . .” should be “But Say insists. . .”

Say Versus Ricardo

• Say’s emphasis on utility differed from Ricardo’s theory.

• Ricardo acknowledged that only a good with utility would have a positive price. If no one wanted a good, then no one would pay anything for it, no matter how much labor had been required to make it. But once a good has utility, labor cost determines its price.

Factors of Production

• Say applied his emphasis on utility to factors of production also.

• The value of a factor of production like land or labor depends on how much it will help produce a good that consumers want. In other words, the value of the consumption good determines the value of the production good

Factors Continued

• What about production goods that are used to make other production goods? E.g., a machine used to make other machines.

• Their value is determined by the value of the good they help to produce, just like the value of the first-level production good is determined by the value of the consumers good it helps to produce.

• This stages of production analysis was carried much further by Böhm-Bawerk and other Austrians.

The Entrepreneur

• Say emphasized the entrepreneur. Production doesn’t happen automatically, through combining land, labor, and capital.

• Someone must speculate on what will make money and bring the factors of production together. This is usually the capitalist.

The Entrepreneur Continued

• The capitalist advances money to the owner of the factors of production. E.g., he pays workers before selling his product.

• He thus takes on considerable speculative risk. His power of judgment is essential.

Say’s Law of Markets

• Say is most famous for his law of markets, which was attacked by Keynes. Rothbard thinks that Say was right.

• The law is that the demand for goods and services consists of the supply of other goods and services. We can see this most clearly in a barter economy, but money doesn’t change things. Say viewed money as a commodity.

Say’s Law Continued

• The law implies that there can’t be general overproduction. Human wants are unlimited.

• Of course there be too much or too little production of particular goods and services, because of entrepreneurial error.

• The law should not be stated, “supply creates its own demand”. The supply of one good usually isn’t the demand for the same good.

Say on Taxation

• Rothbard thinks that Say was especially good on taxation.

• Adam Smith tried to established canons of taxation, such as ability to pay.

• For say, all taxation was bad—taxes should be as low as possible.

• The state was predatory, not productive.

Destutt de Tracy and Jefferson

• One of Say’s most important colleagues was Destutt de Tracy, who coined the term “ideology”, meaning by it the study of human action. He shared Say’s views critical of government and in favor of the free market.

• Both de Tracy and Say opposed Napoleon, who attacked them.

Say,Destutt de Tracy and Jefferson

• Both say and de Tracy influenced Jefferson. He shared their hard money views and opposition to paper money, government debt, and high taxes.

• He translated part of de Tracy’s Commentary on Montesquieu himself, and arranged for someone else to translate the full work. He also helped in the translation of Say’s Treatise.