List of top five pre-classical economists:- 1. William Petty 2. John Law 3. Richard Cantillon 4. Sir David Hume 5. James Steuart.
Pre-Classical Economist # 1. William Petty:
Petty was born in Hampshire on December 16, 1623. His chief economic writings were “A Treatise of Taxes and Contributions” (1662), “A Tract Concerning Money” (1682) and “Discourses on Political Arithmetic” (1660). Petty is aptly regarded as the founder of political economy and statistical method.
He is remembered for his contributions in the field of economic theory. He had a quantitative bent of mind and was the first to develop a fact-finding approach in economic enquiry. As a statistician, Petty confined himself only to the employment of quantitative data and used simple averages as the statistical technique.
What distinguishes Petty in the field of economics is not his statistical method but the economic concepts which he derived from his statistical investigations. His economic ideas are the result of his brooding over the actual problems of his time and country. Petty’s most important contribution to economic theory was his theory of natural par which also included his views on rent and value.
Petty’s theory of natural par has three variations:
(1) Natural Par Between Land and Labour:
Petty believed that land and labour were the two original factors of production capable of generating value. Petty’s next step was to relate the value of land and labour by equating a piece of land producing a day’s food of an average man to the day’s labour of the same man. Thus, the common measure of value, that Petty singled out, was ‘day’s food, and it is through this measure that he was able to convert the value of land into the value of labour and thus to make a par between the two.
(2) Natural Par Between Rent and Money:
Petty realised that the commonly accepted measure of value was not ‘day’s food’ but money. The question that strained his mind was to determine the money value of the surplus product, which Petty called rent. Natural and true rent is the surplus of corn over what is used by the cultivator to meet his cultivation expenses as well as his subsistence needs. Thus, rent is simply the difference between the total production of land and the cost of producing it.
What is the money value of rent? Petty’s answer is that the money value of annual rent will be equal to the surplus silver which is left after deducing the cost of production of silver (including subsistence wage of the worker working in the silver mine) from the annual production of silver. If a man produces a net surplus of silver equal to one ounce during the same period, then the price of a bushel is an ounce of silver.
Thus, Petty’s theory of value is a by-product of his theory of rent and as he emphasized the importance of both land and labour in his analysis, his theory may more appreciately be called a land – labour theory of value rather than labour theory of value. In his analysis of value, Petty ignored the use-value and set aside the differences of various lands.
(3) Natural Par Between Rent and Interest:
Petty also attempted to link rent with interest. Natural interest (net of risk premium) will be equal to the rent of so much land as the money lent will buy. Petty was also the first to pen down a systematic treatise on public finance. In fact his all other economic ideas are interconnected with his ideas of public finance.
Petty singled out six heads of public expenditure defending the country, maintaining the rulers, ensuring justice, supporting educational institutions, helping the orphanages and their dependents, and maintaining the public works like roads, streams, bridges etc.
On the revenue side, Petty regarded the tax on rent as the most suitable source of public revenue. In a new country, such a tax is the best one. In this case, land tax will be immediately capitalized because the new buyers of land will certainly take the tax into their consideration. As a result of this, land price will fall.
In old countries, the land tax will affect different classes of people differently. In case of short period lease, the land tax will compel the landlords to step up the rent and the tenants to raise the price of corn. Thus, the ultimate burden of tax will fall on the consumers. In case of a long-term lease, the landlords will not be able to pass the land tax on the tenants.
On the other hand, the tenants will sell the corn at the same higher price at which the short term tenants are selling. The net effect will be that the long-term tenants will be better off after the imposition of land tax. The consumers are always the losers. Whether the lease is for short period or for long period, the burden of land tax will fall ultimately on the consumers through higher prices.
Petty was of the view that taxes should be proportional and equitable. He justified such a tax on the ground that it will not affect the relative economic position of different tax payers and all of them will suffer the burden of tax proportionately. The revenue collected through taxes must be spent in such a way that it promotes industry and trade of the country.
Petty’s other theoretical achievements were in the field of wages, money and income. Petty referred to a normative subsistence theory of wages which stated that wages should not be more than subsistence. If they are more than subsistence, the workers will prefer leisure to work. Thus, Petty hinted at the backward sloping supply curve of labour.
In the field of money, he regarded velocity of money as a function of peoples’ pay periods. Petty also realised the importance of national income in economic analysis. By making it clear that the national income is always equal to the national expenditure, he anticipated Keynes theory of income-expenditure equality symbolized in his famous equation: Y = C + I.
A review of Petty’s “Treatise of Taxes and Contributions” reveals a number of analytical flaws; but in-spite of these flaws, the work continues to be great because of its scientific character. Orderliness of the outer structure and Consistency of the internal analysis are the two qualities which give the Treatise its status as a scientific work and rank Petty among the originators of scientific economics.
Pre-Classical Economist # 2. John Law:
John Law (1671-1729) is better known as a man of practical affairs. But he made an important contribution to the theory of money and made a distinction between the use value and market value of a commodity. In Money and Trade Considered; with a Proposal for Supplying the Nation with Money (1705,2nd ed., 1720), he points out that use value (which the modern terminology is ‘utility’ of a good) is necessary for a good to command a market value, but it does not determine the market value.
The latter depends upon the relative supply and demand position. He gives the well-known examples of water and diamonds to prove his point. Water has a high use value, but on account of its abundant supply, it has a very low market value; diamonds, on the other hand, have very low use value, but command a high market value on account of their scarcity.
The same idea, as extended to money, implies that money also has no imaginary value. The value of money depends upon the uses to which it is put and the service which money renders to the society is similar to the service which any other commodity provides.
John Law is remembered, more than anything else, for his suggestions for the issue of paper money so much prevalent in the modern times. However, as a typical Mercantilist he desired that the State should have stock of treasure and he wanted that the paper notes would only take the place of metallic money in transactions of the public and that bullion would then accumulate in the State’s treasury.
The issue of paper money resulted in severe inflation which caused much ruin. Ultimately the only property that remained was land which came to be regarded most important as envisaged in the development of French Physiocratic thought.
Also, he is generally regarded as the founder of a subjective theory of value, with special reference to the value of money. He definitely rejected the idea that money had an imaginary value. According to him, nothing had any value except for the use to which one puts it.
The same was true of the money commodity even in relation to its monetary uses. The service which it rendered as money was no different from its other services or from the services of any other commodity. These views clearly make him a forerunner of Austrian School.
Pre-Classical Economist # 3. Richard Cantillon:
Richard Cantillon’s “An Essay on the Nature of Commerce in General” is the most systematic statement of economic principles, before the Wealth of Nations. The Essay begins with a definition of land as the source of wealth, labour as the power which produces it, and all material goods as its constituents. It goes on to discuss the economic structure, wages, value, population and money.
The second part of the book is taken up mainly with problems of money, exchange, and interest; and the third part deals with foreign trade, the mechanism of the foreign exchanges, banking and credit. It is in the last two parts that Cantillon excels in original analysis and description.
For it is here that he is able to combine his insight into economic principles with his own commercial experience and to write sentences which can take their place with any modern work on those subjects. He has none of these difficulties about the mechanism of foreign payments which had troubled Locke.
If a state, he says, has an export surplus for any considerable time and is drawing specie from other countries, ‘the circulation will become more considerable there… money will be more plentiful there, and consequently Land and Labour will gradually become dearer there’. This will at once redress the balance of trade.
The analysis of the effects of an increase in the circulating medium is even better worked out than in Hume. Assuming an increased gold output from the mines, Cantillon is able to show how the benefits of the increased purchasing power that has become available are distributed.
The owners, smelters, refiners and other workers will be the first to be able to increase their demand for food, clothes, and manufactured goods, the suppliers of these commodities will in their turn be able to increase their expenses.
But the share of commodities that goes to other people in the state must of necessity be diminished, because they do not participate at first in the wealth of the mines. The path of rising prices and the ensuing changes in the distribution of wealth are then carefully traced and even international effects were not ignored.
Altogether, this argument remains an excellent demonstration of an important aspect of monetary theory. Cantillon was also aware that the effects of an increase of the money commodity and those of paper money were only apparently the same. Ultimately an abundance of ‘fictitious’ money would vanish ‘at the first gust of discredit’ and would precipitate disorder.
On the question of foreign exchanges, too, Cantillon was able to express clearly the principles which underlie economic practice. He showed the relation between merchandise trade, speculation and specie movements; and he showed also their interaction with exchange rates and price-level in the mechanism of international payments. Particularly lucid was the explanation of the causes which raise or lower the exchange from parity and the way in which such movements can be foreseen and discounted.
The central questions of value, ages and price are contained in part one of Cantillon’s Essay. His treatment of these is not always strikingly new. He owes more to his predecessors, and he gets less far ahead of them than he does in other matters.
In particular, the analysis of value lacks some consistency; though it is perhaps for that very reason that Cantillon may be taken as one of the early representatives of the eclecticism which became a characteristic of English economic thought. His theory of value is in origin a labour theory but it is transformed into a cost of production theory and it also contains some admixture of a supply and demand theory. The first strand of thought is derived largely from Petty, the second from Locke.
Cantillon repeats in different words Petty’s theory of the origin of wealth.’The Price and Intrinsic Value of a Thing in general is the measure of the Land and Labour which enter into its Production.
The meaning of the subsequent analysis amounts to this: if two goods are produced by the same amount of land and labour of the same quality, they will have equal value. But the proportion in which land and labour will determine the value of particular goods will vary. In some cases – a watch- spring, for example – ‘Labour makes up nearly all the value’. In others for example-the price of ‘a Wood which it is proposed to cut down’-land is the chief determinant.
Besides making cost of production (wages of labour plus cost of material) determine value, Cantillon also distinguishes between the intrinsic value and the fluctuating price at which goods are sold in the market. A rich man who has spent much money on beautifying his estate will not necessarily get its intrinsic value when he comes to sell it.
Nor will farmers get the expense of the land and labour which have entered into the production of corn if they have produced more than is necessary for consumption. The ensuing excess of supply over demand will depress the market price below the intrinsic value. Intrinsic values never alter. But because it is impossible always to apportion production among different commodities in perfect harmony with consumption, variations in market prices will occur.
The supply and demand forces are again mentioned in connection with the problem of money. Cantillon agrees with Locke’s quantity theory, but corrects it by pointing out that commodities destined for export must be excluded when the mass of commodities is compared with the volume of circulating money.
He does, however, disagree with Locke’s view of the value of money. Like Law, her rejects the definition which gives money an imaginary value. It is true, he said, that common consent has given gold and silver value; but so it has to everything which cannot be regarded as an absolute necessity of life. The precious metals have a value which is determined in exactly the same way as that of any other commodity, namely, by the land and labour which enter into their production.
Cantillon develops this point at some length. He gives a theory of the value of money, and of money’s function as a measure of value, which is based on the labour theory of value. ‘The intrinsic Value of Metals’, he said, ‘is like everything else proportionable to the Land and Labour that enters into their production’, though their market value, like that of other goods, might vary according to supply and demand. As for acting as a measure of value, money ‘must correspond in fact and reality in terms of Land and Labour to the articles exchanged for it’.
Cantillon was troubled by his dual source of value; and whether ‘some relation might be found between the value of Labour and that of the produce of the Land’. This inquiry into the Par, an expression taken from Petty, resolves itself into a discussion on ages which leads to results somewhat similar to those of Petty.
The clue of the Par is to be found in the amount of subsistence required to produce a given amount of labour. From that, the amount of land which has to be allotted to this purpose can be deduced. And an equivalence between land and labour is thus established.
Cantillon uses a number of examples covering slaves, serfs, craftsmen, and others; and he concludes that the intrinsic value of labour is found in the amount of land needed to support the laborer’s sustenance plus an equal amount for the rearing of two children up to the age at which they can work. Cantillon speaks of two children, since he accepts Halley’s calculation that half the children that are born die before the age of seventeen.
Pre-Classical Economist # 4. Sir David Hume (1711-1776):
Sir David Hume, though primarily a philosopher, is also known as an economist. He exerted a great influence upon Adam Smith and his followers. His special fields of interest were philosophy and literature. He had great analytical powers and great ability to harmonies divergent views. He was endowed with great powers of clarity of expression.
His ideas about economic problems were quite in advance of his times and he can be classed as a liberal mercantilist. His chief work was “Political Discourses”—a collection of economic essays of which, ‘Of Money’, ‘Of Interest’, ‘Of Commerce’ and ‘Of Balance of Trade’ are the most important. He has over-emphasised the importance of money for stimulating trade. But on the whole he has followed the view held by Locke that money was only a symbol and that the amount of money possessed by a nation was of no significance.
In the field of quantity theory of money he discarded the balance of trade argument and held that the movements of species would affect prices and hence the merchandise trade. He said that balance of trade of a country could not be permanently favourable or adverse and in the long run the balance of trade depends on the relative economic conditions of the countries concerned. He was thus an advocate of free trade.
The contribution of Hume to economic thought relates to the fields of money, price and interest. He regarded price to be the result of amount of money. Regarding the value of money, it was fictitious to him. Money represented commodities and its value was determined by the quantity of commodities for which it was to be exchanged.
He considered the changes in the quantity of money to be of importance because they could be effective in changing the habits of the people. Changes in the quantity of money may bring about any change in the prices if the habits of the people are altered.
In case prices go up as a result of an increase in money, such a rise would be beneficial because it would stimulate the industry. In this respect Hume’s position is secure in economics because he analysed the problem in such a way that it was used by economists who followed him. Even Keynes may be said to have made use of his thoughts.
He held that a lower rate of interest was the surest sign of a country’s flourishing state. He opposed the regulation of interest by the state. He said that the rate of interest was determined by the supply and demand of borrowers and lenders. In his opinion profits and interest were inter-dependent; the low profits of merchandise induce merchants to accept more willingly at a low interest. No man will accept low profits, where he can have high interest.
He regarded land as the source of all useful things but he had hardly any love for the landed class. In his opinion land owners who earned income without any labour were bound to be extravagant. They diminish the quantity of available capital and thus help in raising the rate of interest.
On the other hand, commercial classes were all the time working in the interest of the nation by creating capital in abundance and by accepting low profits. It is thus clear that he gave ideas which were adopted by writers who followed him and it cannot be denied that he was one of the earliest forerunners of classical economics.
Pre-Classical Economist # 5. James Steuart:
Sir James Steuart (1712-1780) was the chief English Mercantilist writer of the eighteenth century. Indeed he has been called the last of the Mercantilists. Following the Stuarts into exile in 1745, he lived in France, Germany, Holland and Italy; and his book (1767) is largely a collection of observations made during this time.
Its title is An Inquiry into the Principles of Political Economy, being an Essay on the Science of Domestic Policy in Free Nations, in which are particularly considered Population, Agriculture, Trade, Industry, Money, Coin, Interest, Circulation, Banks, Exchange, Public Credit and Taxes.
This seems to be the first use of the term Political Economy in an English book. His idea of the science has Mercantilist earmarks: “Economy in general is the art of providing for all the wants of a family, with prudency and frugality. What economy is in a family, political economy is in a state… The principal object of this science is to secure a certain fund of subsistence for all the inhabitants” and to render it secure. Economics is an art.
Money and banking are treated at considerable length. Steuart justifies interest, but has no clear understanding of capital. He feels that a low rate of interest would be beneficial, only governmental measures to secure it should be gradual.
The mercantilist remnant in Steuart’s thought concern mainly the origin of profit, or the surplus. Steuart still spoke of a profit which arises in exchange, i.e. when a commodity is sold above its value. But he went further and admitted that such profit did not really create new wealth. He distinguished, therefore, between positive profit and relative profit.
The latter represented only ‘a vibration of the balance of wealth between parties’; it did not add to the existing volume of stock. Positive profit, on the other hand, did not cause any one any loss; it arose from a general increase in labour, industry, and skill and it added to the public good.
He carried a similar distinction into his explanation of value. Developing a cost-of-production theory of value, he distinguished between the real value of commodities and the profit upon alienation obtained in their sale.
Real value was determined by three factors; first, the amount of it which a workman could on an average produce in a given period of time; secondly, by ‘the value of the 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 the materials, that is the first matter employed by the-workman’.
Given these three amounts, the real value of a good is determined. Anything above this is the profit of the manufacturer and depends on the conditions of supply and demand. The significance of this analysis is twofold.
In the first place it makes the manufacturer’s profit arise only in exchange and thus represents a consistent application of the mercantilist theory of the surplus. In the second place, it leads Steuart to develop a supply and demand theory of price which was very elaborate for his time.
This theory can be summarized as follows. Prices are in equilibrium when demand and work balance. (Stuart’s own theory of real value shows that he thought of the harmony between market prices and intrinsic value in the same terms as Cantillon). This balance may be disturbed and the price will vary. Steuart enumerated some of the factors which would cause discrepancies between supply and demand, among which the purchasing power of the buyers and the degree of competition were the most important.
He explained the mechanism of ‘double competition’ which would be brought into play by discrepancies between work and demand. If demand was lower than supply, sellers’ competition would reduce the price, destroy profits, and even cause loses. If demand exceeded supply, buyer’s competition would raise prices and profits.
In the case of merchants engaged in regular trade this mechanism would work sufficiently,well to make real value effective, and only variations in profits would occur. But bigger changes must not be allowed to affect equilibrium; in these, as in many other cases, Steuart was a firm believer in the desirability and efficacy of state intervention.
Steuart also tended to mercantilist views in the theory of money, and his statements on the value of money and the balance of payments are often obscure and contradictory. He was nevertheless able to correct a number of errors in the analysis of Locke and Hume. In particular, he avoided their mechanical juxta position of the mass of commodities and the quantity of money in circulation.
He took up the view, which had been expressed before by Petty, that the circulation of a country could only absorb a definite quantity of money. Money, he thought, is needed within a country for two purposes: to pay the debts one owed and to buy the things one needed. The state of trade and manufacture and the habits of the people determined the demand for money this a given quantity could satisfy.
Following North, he said that any metal over and above that required for monetary purposes would be hoarded or converted into plate. Should, on the other hand, the amount of gold and silver be insufficient to sustain a country’s circulation the difference would be made up by symbolic money.
The result is that ‘whatsoever be the quantity of money in a nation, in correspondence with the rest of the world, there never can remain, in circulation, but the quantity nearly proportional to the consumption of the rich and to the labour and industry of the poor inhabitants’.
Steuart’s attitude to the economic process was old-fashioned and somewhat reactionary. His work breathes little of that air of unbridled self-interest and freedom of trade that was common at the time. But it is perhaps because of this attitude that Steuart was able to give an interesting account of the development of capitalism.
He began with the origin of society (this incidentally led him to an anticipation of the Malthusian theory of population somewhat similar to that of Cantillon) and traced its structure through changes in methods of production and relations of classes. He stressed the fact that labour was the only source of an increase in the supply of the means of subsistence and developed the concept of an agricultural surplus, the division of classes and rise of industry.
Finally, he brought out clearly the difference between particular forms of labour which created specific use-values, and labour as a social abstraction which created exchange-value. He called industry that form of labour which by alienation created an universal equivalent.