The Creation of
Classical Economics
Do not reprint or quote without permission by the author.
For
all of human history up to the 18th century, the
science of economics was stagnant, nearly nonexistent.
But then in the 1700’s, economics
unexpectedly sprang out of obscurity, quickly rising to become the most
recognized social science of the modern world.
Something of historic import had happened during that one
century. The most
identifiable event in the 18th
century was the American Revolution; however, this was merely a
consequence of
another revolution, this one economic.
This long-forgotten movement was the Age of the French;
the founding of
modern economics. It all began with
“L’economistes,” or, as they preferred,
the
“Physiocrats:” the rulers of the mind.
Adam
Smith, the Scottish professor, is identified by
most modern economics textbooks as the “father of modern
economics.” Actually,
his part in the founding of economics was minimal compared to the vast
influence of his French contemporaries. Both before and after Adam
Smith
published his famous An Inquiry into the
Nature and Causes of the Wealth of Nations, French economists
were making
breakthrough discoveries that have been ignored by most economic
historians.
The
Age of the French consists of two periods; the
Physiocratic Age and the
During
this noteworthy economic era, the foundations
of the
The
Age of the French is vital to the study of
economics because it defined the Classicist reaction to the Nationalist
School. It was the
first time in history that
economics had been studied in terms of individuals, rather than the
state. This was the
first time that people were
actually consulted on how their property ought to be used. In short, the Age of the
French determined
the rest of economic history, since all economists thereafter would be
obliged
to assume either the philosophy of individualism or statism. Thus, these Age of the
French economists did
more than merely found Classicism or invent the philosophy of
individualism. The
Age of the French
also determined the path that economics – and to a great
extent world history –
would follow.
Before Classicism and Nationalism
– Pre-Economics
Adam
Smith once said, “I am a beau in nothing but my
books,”2 essentially meaning “I love nothing but my
books.” The question
logically follows, what did he read?
Where did he, and his French predecessors the Physiocrats,
derive their
ideas? Before the
Age of the French,
there were two chief contributions to economic understanding. The Greek thinkers Plato
and Aristotle were
likely the first to debate property rights, but not until after the
Protestant
Reformation would economics arise again as a subject of debate, this
time among
an anonymous troupe of Spanish scholars.
Plato
and Aristotle, despite their close friendship,
espoused vastly different beliefs.
Plato, in his Republic,
outlined his version of “good government.”
It would be essentially a Greco-Communist oligarchy; an
assembly of
philosopher-kings, which would rule over a loose collection of
city-states.3 His
primary theme was
collectivism, a central tenet of nationalism.
There was to be no private property and no free market
(nor any market,
for that matter) in this Greco-utopian paradise.
Aristotle, in contrast, preferred a bit more
individualism in his scheme for the ideal arrangement of “man, economy,
and state.”4 Aristotle
favored private property, but
failed to associate that concept with a belief in free enterprise, as
he
believed that private trade was immoral.5
The concepts of property and market were slow to develop;
frequently the
two were isolated as two different ideas, although they are clearly
connected.6 Slowly,
the foundations of
the Classical School were laid; how slowly is illustrated by the time
it took
until the next economics debate. It
was
nineteen centuries later, in post-Renaissance Europe.
The
Protestant Reformation brought spiritual revival,
and with it the opportunity to explore spiritual and material questions
without
being silenced by the Pope. Probably
the
largest debate during this period was the nature of the
“just” price of a
commodity. What was
the desirable price
for a commodity? The
Classicist answer
to this came from an obscure group of Spanish scholars, who declared
that the
fairest price of a product was in fact the going market price.7 It was a small step
indeed, but this belief
in market superiority eventually led the Physiocrats to their stance on
“laissez-faire.”
It
is interesting to note that during this same
period, Nationalism grew into a substantial force – rising
first in the
primeval empires of Egypt, Persia, Greece, and Rome, to the Medieval
kingdoms
exacting tribute from serfs and conquered vassals, to the Kings and
Queens of
the Renaissance. The Nationalists enjoyed immediate success, while the
Classicists waited two millennia for a single concept to develop. Why the difference? Simply put, it lay in
human nature. Humans
have a tendency to covet power and
authority for themselves; in short, human nature is corrupt. Man desires the power to
control ourselves
and others. The
theories of the
Classical School run contrary to that; it essentially states that the
market
works best when left alone. Kings
weren’t fond
of that idea, as it
challenges their authority. The
Classical School was forced to passively wait for the culture to
evolve,
refining their ideas as best they could, so that when they presented
their
alternative to Nationalism to the people, they’d rally enough
support to give a
unified front against monarchical powers.
This explains the lengthy delay for Classicism’s
central ideas to
develop.
The First Nationalists –
the Mercantilist School
The
Mercantilist School was the first economic
proposal behind Nationalism. Up
to that
point, nobody had even bothered to defend the ultimate authority of the
state. The state
was supreme, whether
you liked it or not. As
King Louis the
Fourteenth of France succinctly stated, “L’Etat,
c’est moi:” “The
State, that’s me.”
However, during the 18th century, the
Classicists began to present their case to the people, so the
Nationalists were
forced to respond. The
Mercantilists
were the first to try to prove that the Nationalist School was an
economically
sound choice.
The
Mercantilists failed miserably in constructing a
defense of statist principles, but modern-day Classicists and
Nationalists
alike can learn much from them. The
key
difference between the old Nationalist School and modern
neo-Nationalists is
one of tactics, not material. The
Mercantilists primarily failed due to their lack of subtlety; they
failed to
disguise their statist notions under the façade of an
economic crisis. As the
Nationalist school aged, proponents were obliged to dilute their blunt
convictions of ultimate state control over the economy into a cure for
some
invented economic crisis. Marx
chose
“exploitation of workers,” Keynes
“imbalance of supply and demand, causing
depression equilibrium” to justify extensive governmental
action in the
economy. However, because the Mercantilists did not know of this tool
at their
disposal, they became universally notorious for blatantly supporting
absolute
political control over all human actions.8
How
did the Mercantilists defend their notions of
state supremacy? Unfortunately
for early
Nationalist history, they utterly failed.
They were quite proficient at answering how they ought to
regulate the
market, but they fell short of answering why. Nevertheless, the
Mercantilists
are important to study because they defined Nationalism in its most
basic form,
without the embellishments of “worker’s
rights” or some other smokescreen.
For the Mercantilists, the State was in
charge, period. This
meant that economic
activity was intended to benefit the state, and the state alone. Individuals were an
afterthought. How
did the Mercantilists apply their
standard of state superiority?
A
chief Mercantilist belief generally is called
bullionism, and is defined as the belief that gold and precious metals
are the
sole source of wealth (not value, but wealth.) This is significant
chiefly
because it contributed to the mercantilist theory of a
“zero-sum game;” after
all, if wealth is finite, then the only way to grow is for someone else
to
lose. Their notions
of bullionism and
zero-sum game led the Mercantilists to a second key principle called
“the
favorable balance of trade” (or, a little more bluntly,
“King of the Hill.”)
The
Mercantilists believed that the only way their
nation could grow was at the expense of others.
They concluded that the most effective means of doing so
was through a
favorable balance of trade. This
was the
belief that imports were bad because it meant that they had to pay for
those
foreign commodities with gold, while exports were good because they
acquired
gold in the transaction. Thus,
the way
to build the wealthiest nation was to buy nothing and sell everything.9
Another
tenet of the Mercantilist belief in State
supremacy was the labor theory of value.
That is, all value is derived from the labor put into it.10 For the Mercantilists,
value was merely a
measure of the gold to be gained – their notions of
international trade
dictated that value of exports equals the amount of gold imported. These two facts led them
to a system of forced
labor. After all,
if the labor exerted
equals the gold gained, why not impose labor on women, children, and
the
handicapped. This
might have some
serious side affects on individuals, but they were merely an
afterthought.
Finally,
Mercantilists accepted Agrarianism, the
belief that agriculture is the only productive economic activity. They reasoned that since
farming was the only
industry where products where actually created (other industries only
refine
natural resources to create their products) then clearly agriculture is
the
only industry to create value. This
led
them to conclude that taxing industrial activity was a good thing,
since they’d
funnel the supposedly unproductive investments to agriculture.
The
Mercantilists were the epitome of the Nationalist
School. Since they
failed to conceal
their statist ideology, they are an ideal case study of Nationalism
fully
exposed. This
becomes especially useful
when examining the labor theory of value.
The Mercantilists used the labor theory of value to
shamelessly promote
the state. Marx
diluted the theory
somewhat to support his Communist agenda.
Neo-Nationalists (Keynesians and others) deviously used
this theory –
despite their claims of opposing it – to justify the
existence of labor unions
and government intervention in business affairs.
The difference between these three uses of
the labor theory of value is the extent of subtlety involved. Mercantilists, Marxists,
and Keynesians all
share the same near-religious devotion to the State; it’s
just that some are
better at hiding it than others.
Mercantilism
is valuable for Classical analysis
because it provides a look at the basis of Nationalism.
Nationalism is statism – the belief in the
supremacy of the State. All
Nationalists
believe this, be they Marxist, Keynesian, or some hybrid
neo-Nationalist. When
faced with a crisis – either one of
their own creation or merely a market downturn – Nationalists
will infallibly
recite “The State is the Solution.”
Although
the issues raised by the Nationalist School to conceal their true
convictions
are important, they are not the core tenets of Nationalism. It is merely a skirmish,
intended to avert
Classicist offensives in the universal battle between individualism and
statism. The
Physiocratic School
recognized these differences, prioritizing their fight first against
statism
and collectivism, then against particular diversions erected by the
Mercantilists. Consequently,
they became
the most successful economic school in history.
No other school so rapidly seized the hearts of the people.
The Rulers of the Mind: Physiocrats
and Classicism
After
several millennia of refinement, Classicism was
ready. And what a
perfect opportunity to
present itself; the Nationalist alternative, in the form of
Mercantilism, was
so flagrantly anti-individualistic that it would be even easier to
convert
people to the Classicist cause.11
And
so, Classicism presented itself for the first time to the common man,
its
proponents taking on the name “Physiocrat”
– rulers of the mind.
The
Physiocrats formed the first modern school of
economic thought. They
instituted many
of our modern traditions, including the custom of inventing new
economic terms
to symbolize the creation of a new economic school.
Among their numerous achievements, they
formulated the alternative to the labor theory of value, which they
used to
concoct the Classicist model of price.
This was indeed the founding of modern-day economics. Yet, inexplicably, they
are the most abused
group of economists in history. Few
economic history texts mention them; if they do, it is to denounce them
as
agrarian primitives. Although
this may
be true for some of their number, such as François Quesnay
and perhaps Jacques
Turgot,12 this broad-brush evaluation is hardly credible.
In
a study of the Physiocratic School, there are two
notable periods. The
first is indicated
by the founding of Classicism, the second by the refinement of
Classicist
ideas. The first
period is slightly less
sophisticated, and includes Charles de Secondat Montesquieu,
François Quesnay,
and Jacques Turgot. The
second was a
much more productive time in Classical economics, and consists solely
of
Richard Cantillon and Etienne Bonnot de Condillac.
Although Turgot is superior to the
philosophers of the first period – arguably sufficient
grounds to include him
in the second – he cannot compare to the master economists
Cantillon and
Condillac, and therefore ought to be included in the first.
Charles
Montesquieu was technically a political
philosopher, not an economist, but his work The
Spirit of the Laws does contain some valuable Classicist
ideas. Cited often
as the inspiration behind the
American federal system, Montesquieu specialized in writing on
international
trade. Dr.
François Quesnay also
specialized in that field; he is most recognized as the inventor of the
famed Tableau Economique,13 which
can be
interpreted as a diagram describing international trade. (No one
actually knows
what it is supposed to mean, but this is one hypothesis on its purpose.) Quesnay was the leader of
the Physiocratic
School, and may rightfully be named the father of the Physiocrats. He was not only the most
distinguished
Physiocrat, he was also the most primitive.
He was an agrarian, and held that industry was
unproductive, but despite
these shortcomings he was genius enough (and bold enough) to found the
Physiocrat School in the face of potentially lethal opposition. Jacques Turgot, his
successor in fame and
finesse, was the first Physiocrat to gain a political office when he
acquired
the position of “Minister of Finance.” (He was
fired soon afterwards, as the
King by then had realized his Physiocratic intentions, but not before
he had
dissolved many regulatory measures instituted by Jean-Baptiste Colbert) Like Quesnay, Turgot was
an agrarian,
although he was remarkably advanced in a number of other areas,
proposing many
new ideas affecting the Classical model, such as his ideas on capital,
interest, and time preference.14 Turgot
presented these views and others in his Reflections
on the Formation and Distribution of Wealth.15
Richard
Cantillon actually lived during the first
Physiocratic period, long before Turgot obtained the seat as Minister
of
Finance. However,
Cantillon died16
before his book, Essay on the Nature of
Commerce in General, could be published.
His Essay went on the
back-burner for some time, and was finally published a little while
after
Turgot, thus Cantillon’s placement in the second period. In his Essay,
he presented a pre-Austrian model of monetary inflation, including rise
of prices,
change of spending habits, and other concepts rediscovered by the
Austrian
School.
As
luck would have it, Etienne Bonnot de Condillac’s
magnum opus, Commerce and Government,
was published one month before Adam Smith’s Wealth
of Nations. Otherwise,
he would have
been included into the French School of a later age, which was much
more
advanced than the Physiocrats. It
would
have been quite an addition. Condillac
was a French philosopher who joined the Physiocratic ranks and became
their
central character. As
for his ideas, he
was arguably the world’s first Monetarist, two hundred years
before the school
was founded. He
expounded an alternative
theory of value, created the modern scheme for price, and aided
Cantillon in
his analysis of monetary inflation.
The
Physiocrats are best known for their support of
international trade – also a favorite of Adam Smith and the
French School. Perhaps
they enjoyed debating the subject
because their opponents, the Mercantilists, were so primitive in their
dog-eat-dog
worldview. Charles
Montesquieu was the
first Physiocrat, and the first to write on international trade. He expressed the novel
concept that perhaps
international commerce and private interests would lead toward more
peaceful
international relations. Etienne
Condillac, the last of the Physiocrats, also contributed, when he
stated the
basic Classicist premise that commercial exchange benefits both parties. Benjamin Franklin echoed
the Physiocrats when
he wrote, “In transactions of trade it is not to supposed
that, as in gaming,
what one party gains the other must necessarily lose.
The gain to each may be equal.
If A has more corn than he can consume but
lacks cattle, and B has more cattle but wants corn, exchange is gain to
each;
thereby the common stock of comforts in life is increased.”17
Overall, the
Physiocratic “laissez-faire” beliefs have held even
to modern times. The
market is the market, and does not
exclude foreign countries in its dealings.
The government shouldn’t restrict free trade,
including that with
foreigners.
The
Physiocrats were the first to fully grasp the
importance of business in the economy.
Both Richard Cantillon and Jacques Turgot expounded the
importance of
the “middle-man” in economic transactions.
To sell directly from the producers to consumers would be
ludicrous,
because the raw materials must be refined for public consumption before
any
utility can be derived from them.
Somewhat ironically, both Cantillon and Turgot made the
same wholly
original contributions. Cantillon
discovered the model of a business economy, where price and economic
activity
is affected by individual companies, and wrote about it… but
died soon
afterwards and his book wasn’t published until Turgot had
independently
conceived of the idea.
It
is in the areas of value and price that the
Physiocrats truly shine, and in both Etienne Condillac is their
spokesmen. The
Physiocrats were the first economic
school to oppose the Mercantilist labor theory of value.18 As stated before, this was
the belief that
value is derived solely from physical labor.
However, an alternative theory was offered by Condillac
that states
utility determines the value. In
short,
value is defined not by its cost, but by the subjective worth of the
product to
humans. This stems
directly from the
influence of the Spanish scholars a century earlier who had concluded
that the
just price of a commodity was the going market price.
As an illustration of the utility theory, the
human body, if divided into its fundamental elements, would sell for
less than
five dollars on the commodity market.19
The labor theory would probably say this is the net value
of a
human. However,
according to the utility
theory, this is a meaningless number; rather, it is the purpose for
which we
were made that truly gives us value.
The
Physiocratic invention of the utility theory of
value heavily influenced their model of price.
If value indicates utility, what is price?
Condillac answered yet again for the
Physiocrats. In his
Commerce and Government, he
presented the novel concept that price
is an gauge of two unequal “utility-values” of a
product to the buyer and
seller. To
simplify, imagine that a
retailer is selling a pen for one dollar.
There are several conclusions that can be made from this. First, the retailer
obviously values the pen
less than the dollar; otherwise he’d sell it for more or not
sell it at
all. Second, if
someone does buy the pen
at that price, then the buyer clearly values the pen more than the
dollar,
otherwise he’d buy another pen for less or not buy it at all. Thus, the price of an item
measures the
buyer’s and seller’s utility-value of the pen.
Richard
Cantillon also contributed to the Classical
model of price, although not in the same way as Condillac. Rather, he described the
effects of monetary
inflation on the final price of a commodity.
Every exchange is in some way a barter; in the example
above, the
retailer put his pen on the bargaining table while the consumer used
his
dollar. Cantillon
explained that during
a monetary inflation, the supply of money goes up, while the demand for
it
stays roughly even. Thus,
money will
decrease in value. When
the seller of
the pen realizes that the buyer’s dollar has lost value, he
will ask for more
of it to compensate for the loss.
His
subjective value of the pen stayed roughly the same, while the dollar
he valued
above the pen has decreased in overall utility, so he will expect the
buyer to
come up with the difference. That
is the
cause of long-term increases in price, even when the subjective
utility-values
of both the buyer and seller remain relatively constant.
After
examining their brilliance in all economic
fields, from value, to international trade, to inflation, how can one
possibly
call the Physiocrats primitive? Yet
of
the few texts to actually mention this School, most take it upon
themselves to
condemn them! And
if they actually do
give some credit to the group, they will only mention Quesnay and
Turgot, (by
and large the most unrefined Physiocrats of them all) dismissing the
rest of
the school as primitive agrarians.
And
even among these two, nowhere do economics texts mention their boldness
for
standing against Mercantilism, even with the serious consequences for
doing
so. However
bizarre, the Physiocrats,
the founders of modern economics and the Classical School, have been
completely
forgotten. So why
is it that we
disregard Condillac and the rest of the Physiocrats while we all but
worship
Adam Smith? The
answer lies not in any
readily available, documented contribution, but in something more
elusive. The
deification of Smith was not caused by
anything Smith did, but merely the circumstances in which he did it.
The Scottish Movement –
English Economics
Adam
Smith was not the father of economics he is made
out to be.. His
greatest contribution
was in the realm of moral philosophy, a far cry from economic thought. Any genuinely economic
contributions were
derived directly from Physiocratic or Mercantilist influence. Smith
suffered
from a general lack of originality, but that did not stop later
economists from
falling at his feet, venerating this Professor of Moral Philosophy.
Adam
Smith was born in Scotland to a real
“Adam’s”
family; nearly every living male relative – grandfather,
father, brothers, uncles,
et al. – was named Adam.
At age four,
Smith was kidnapped by gypsies, but was soon returned to his family. A biographer, John Rae,
commented, “He would
have made a poor gypsy.”20
A frail child
from birth, Adam Smith was bookish and extremely quiet, making him a
likely
candidate for scholarships and educational grants.
Indeed, that is what happened; at fourteen,
Adam Smith attended Glasgow University and then won a scholarship to
the
respected Oxford University. After
earning his degree in Moral Philosophy, he returned to Glasgow and
earned a
professorship in his major. He
quickly
became the expert in his field after publishing A
Theory of Moral Sentiments in 1759.
After some time at Glasgow, the elderly Smith
was offered a chance to tutor the son of a French duke, which he
accepted. In
France, the Physiocratic movement so
inspired Adam Smith, that he turned from his tutoring and teaching on
moral
philosophy to write his master work, An
Inquiry in the Nature and Causes of the Wealth of Nations. Soon afterwards,
he moved back to Scotland
where he used his expertise to land him a job at the governmental post
of
customs commissioner. Ironically,
despite Adam Smith’s Classical views on international trade,
he spent the last
twelve years of his life hunting down people who had disobeyed
Mercantilist
import restrictions.21
Among
Adam Smith’s primary contributions to the
Classical School was his definitive study on the interrelations of
economics
and moral philosophy. In
his Theory of Moral Sentiments, he
described
sympathy as the driving force behind human action, while in his Wealth of Nations, he concluded that
self-interest was the dominant impulse.
How did he harmonize these two seemingly contradictory
conclusions?22 Adam
Smith believed that man
has a basic desire to be accepted by others.
To obtain this respect, he will try to exude two
inconsistent images of
himself; first, the look of a commoner who can identify with others,
and
second, the air of nobility, what the people want to become. Under most circumstances,
people will act in
sympathy toward others, but will also act in self-interest to promote
themselves. Thus,
Adam Smith’s Theory of Moral
Sentiments and Wealth of Nations
created a step-by-step
model of the human world. This
was his
chief original contribution to economic theory.
A
lesser contribution of Smith was his work on the
division of labor. This
is essentially
Smith’s term for specialization.
Under
most circumstances, specialization is not an economic concept; however,
Adam
Smith attempted to rationalize why humans tend to exchange goods rather
than
make it themselves. For
him, this was
because it was more efficient to specialize, thus human would produce
only one
commodity for the market, which they can sell and use the money to
provide for
themselves. An interesting subject for a book, but not much else.
Probably
the most well known passage in the Wealth of
Nations is the section on the
Invisible Hand.23 Although
he neither
defined this “hand” nor explained how it operated,
it is by and large the most
referred-to quote in economic history.
This is the economic equivalent of the scientific
community referring
only to Democritus as the discoverer of the atom.
(Democritus was an ancient Greek philosopher
who first theorized that matter wasn’t continuous, an
unbroken paste-like
substance, but rather composed of individual particles.)24 Democritus
didn’t discover the atom, nor give
any evidence suggesting that they existed.
Although Democritus was correct in his speculations, any
modern chemist
will agree that he is undeserving of being called the father of modern
chemistry. If only
the same was true for
economists; Smith gave no evidence to support his theory, so although
he was correct
he did not prove it.
Adam
Smith was not the father of economics.
His primary contribution to modern economic
knowledge was his work on Moral Philosophy.
He formed his view of man by first examining sympathy,
then
self-interest. One
of those two happened
to be within the realm of economics.
His
concept of the invisible hand was inconclusive at best, while his
division of
labor was not that notable. Comparing
Adam Smith’s Wealth of Nations
to his
Physiocratic forebearers, it seems impossible to explain the difference
in
treatments. The
Scotsman has been
lionized by Classicists and even some Nationalists, while the French
Physiocrats have been ignored. It
is
ironic to note that of those texts that deride the Physiocrats, none
mention
Smith’s shortcomings – such as his devotion to the
labor theory of value,
agrarian tendencies, or his overall lack of originality. Smith took the approach of
searching for a
simple constant when it is impossible to find one.
This attitude discards accuracy for ease in
economic analysis. As
one economic history
text put it, “Adam Smith didn’t create modern
economics out of a vacuum.25 Quite
the reverse; if anything, Smith created
the vacuum when he eclipsed the ideas of his predecessor’s
with his primitive
speculations.
But
the question remains; if Smith made no truly
original economic discoveries, why is there such a large contrast in
treatments
between him and the Physiocrats? The answer lies in history. We remember Adam Smith
(and his companion
David Hume) because they are directly linked to our British heritage. However, it
didn’t have to be so. The
Seven-Year’s War – better known to
Americans as the French and Indian War – began in 1756 as a
dispute over who
would control America. As
it was, the
British triumphed and America spoke English.
Of course, this meant that the Americans read Adam Smith
first, before
the Physiocrats could be translated.
However, if the French had prevailed, then the Founding
Fathers would
spoken French, and read the Physiocrats and the French School rather
than Adam
Smith. In short,
Adam Smith reached
American ears first (Americans being the first to adhere to Classical
ideology)
and we praise him as the “father of economics”
because of it. Adam
Smith did not found economics, 26 and
any text that say he did is unjustifiably flattering him. It was the
Physiocrats who founded Classicism, and the French School which
preserved and
developed it.
The Greatest Economists –
Say, Bastiat, and the rise of Classical Economics
The
French School was the last stand of early Classicism.
Not until late in the 19th century with the
rise of the Austrian School could another philosopher27 honestly take
on the
title of Classicist. All
others were
Nationalists. Classicism
was under
serious threat; it would have to stand up to more than half a century
of
scathing attacks and blatant attempts to undermine
“laissez-faire.”
The French School would have to give the
greatest defense of Classicism; otherwise, this socio-economic
philosophy might
not survive. Fortunately,
they did…
unfortunately, few remember them for it.
Since they do not share the name-recognition of Smith,
they must be
introduced. This
“Classicist’s Last
Stand” was instigated by Jean-Baptiste Say, who is arguably
the world’s
greatest Classicist, and finalized by Frédéric
Bastiat, a economics journalist
par excellence.28
Jean-Baptiste
Say was born in Leon nine years before
Adam Smith’s Wealth of Nations
was
published. At the
pinnacle of his youth,
he traveled to Britain where he learned English and read Smith. When he returned, by then
a mature young man,
he joined the editorial board of a French magazine, and quickly rose to
become
the editor-in-chief. After
the French
Revolution, he was appointed to the office of Tribunat in
Napoleon’s newly
installed regime. With
that governmental
post in hand, Say turned to economics, and published his A
Treatise of Political Economy, or the Production, Distribution, and
Consumption of Goods. Soon
afterwards, Napoleon personally fired him, and banned his book
– dictators tend
to loathe “laissez-faire.”
Nevertheless,
Say’s “Treatise” enjoyed much success in
France and elsewhere; it went through
four editions in his lifetime, eventually being translated into English
and
became the most popular economics text until John Stuart Mill began
writing
after the Civil War.29 After
being fired
from Napoleon’s government, Say retired temporarily to a
small town in northern
France called Auchy-les-Hesdin where he began a cotton spinning plant. After running this plant
for seven years, he
sold it and returned to Paris, where he published Catechisms
of Political Economy and began the one of the first
public course on economics in the world.
After four years on the corporate ladder, he rose to
become France’s
first Professor of Political Economy.
He
died two years afterwards, but not before he issued his six volume Complete Text of Practical Political Economy.
Jean-Baptiste
Say was history’s first scientific
economist. In his
day, abstract
methodology was a serious economic crisis.
One Scottish abstractionist in particular was propagating
this
alternative economic model. David
Ricardo used so much abstract methodology in his economics text Principles of Political Economy, that
despite his staunch laissez-faire model, his works were actually cited
by Marx
to support communist Nationalism!
In
fact, Ricardo was so ambiguous in his logic model than the entire art
of
abstractionism is named in his honor.
A
Ricardian vice is a common term used to indicate a tendency toward
overly
imprecise reasoning.30 Jean-Baptiste
Say
criticized this impractical logic system, and realized the growing need
for a
concrete deductive model. Not
one to
pass the buck, Say developed one himself.
Adapted from the geometric system of using basic
postulates to prove more
complex theorems, Say’s scientific deductive model brought
the best of the
wholly hypothetical and wholly empirical economics to economic logic.31
But Say wasn’t limited to mere speculation on economic science; he practiced what he preached. He developed many unique postulates, theorems, and concepts for future economic theorists. Among these innovations was Say’s original creation of the word and concept of an economic entrepreneur, driving economic growth. (Somewhat fitting, due to Say’s hands-on experience as a cotton manufacturer.) This entrepreneur has remained in use throughout the modern world as the driving force behind the business cycle. Jean-Baptiste Say’s premise was that the distribution of goods requires the participation of some innovator32 to somehow refine the crude factors of production into desired goods for sale to domestic and foreign consumers. Then he complemented this Theory of Innovation with his familiarity with entrepreneurship, and voila! The entrepreneur was born.
Jean-Baptiste
Say also furnished Classicism with a
core postulate for its model of “laissez-faire,”
which modern economists call
Say’s Law of Markets. He introduced this namesake dictum in
his first work, Treatise of Political Economy,
and used
it to conclude his last work Complete
Text on Practical Political Economy.
What was it, and what did it mean?
As Say himself wrote, “A product is no sooner
created, than it, from
that instant, affords a market for other products to the full extent of
its
value.”33 To
simplify, the production of
a certain commodity creates a demand for other commodities to an equal
extent
as the production. Supply
of X creates
Demand for Y.34
Using
Say’s logic model, what can economists deduct
from this Law? First,
and most
obviously, there is no such thing as over-production.
Overall demand in the economy is always equal
to the overall supply, so how can there be excess supply? Be warned that this is
merely in the general
macro-economic sense. There
is no
guarantee that the individual supply and demand of a certain product
will
remain equal. In
short, there cannot be
overproduction, but there can be production in the wrong ratio to
consumption. Bronze
might be supplied in
excess of what is demanded, while tin and copper consumed in the
creation of
bronze cannot be mined quickly enough to satisfy the demand. In this example, bronze is
supplied more than
demanded, while tin and copper are demanded more than supplied. According to
Say’s Law, the overall
macro-economic levels of supply and demand will remain equal, but the
individual supply and demand ratios will not.35
The quantity of production and consumption are equivalent,
the quality
in which these are manifested will differ.
With
this in mind, the next step is clear.
Since there cannot be overproduction, only
production in a faulty ratio, then the trick to correct these ratios is
not to
encourage a false desire for consumption, but rather to stimulate
production. This is
obviously true on an
individual basis; if someone wishes to increase his standard of living,
he will
look to increase his income, then use that income to buy luxuries. If he simply bought fancy
cars and large
houses, expecting his income to rise because of these new
extravagances, he’d
go bankrupt. The
same applies toward
government. The
trick towards economic
growth is not unsustainable luxuries, but the production of utility.
Besides
being a central principle to the Classical
School, Say’s Law of Markets has also been the primary target
of many neo-Nationalist
attacks, particular from Keynesians.
In
fact, Steven Kates, a commentator on Say’s Law, called
Keynes’ The General Theory of
Money, Interest, and
Employment “a book-length attempt to refute
Say’s Law.”36
Perhaps this is overstated, but Keynes was clearly
bent on disproving Say. To do so, Keynes cleverly resorted to straw-man
argument, distorting Say’s Law of Markets to read
“Supply creates its own
demand”. This
is a devious misstatement;
although technically correct, Keynes exploited the ambiguity of his
interpretation by reading it as “Supply of X creates Demand
for X.” Little
wonder Keynes believed that Say’s Law
was absurd! He was
referring to his
version of it: “Keynes’ Law of Markets.”37
After
refuting himself, Keynes used the still-unproven
idea of supply and demand inequality to provide the rationale behind
his
General Theory. If
supply and demand are
by nature disparate, then it is the duty of government to correct this
imbalance through deficit spending.
Jean-Baptiste Say would be astonished that any
self-respecting economist
could believe such notions. Excessive
consumption only consumes utility and does nothing to create more. In fact, it is even
contradictory to the
formation of utility! When
taken to the
extreme that national debts would be accumulated, this intrusive
measure does
nothing to prevent depressions (it is more likely to cause them than
anything
else!) Not only
that, but the supply and
demand imbalance necessarily resulting from Keynes’s
Nationalist policies must
eventually be corrected, depleting any surplus value that would result
from a
boom. Thus,
excessive consumption
weakens an already volatile economy, intensifying the economic busts
while
minimizing the surplus of the boom years.
Despite
these flaws in Keynes’ General
Theory, many countries around the world have adopted his
neo-Nationalistic philosophy. Perhaps
this is due to his supposed solution to the Great Depression, which he
caricatured as a capitalist failure.
Or
maybe his success merely stems from his Nationalist worldview, which is
quite
popular among governments. For whatever reason, Keynes’
“General Theory” was
established as the modern form of Nationalism, and his straw-man
– Say’s Law of
Markets – was promptly jettisoned.
However, that doesn’t mean Say is irrelevant to
modern economics! Anything
but; his Law was discarded because
it flatly contradicted Keynes. Thus,
it
is a functional weapon against Keynesian theory.
If Classicists can ever expose the true form
of Say’s Law of Markets to the people, then it might in fact
spell Keynes’
demise.
Jean-Baptiste
Say has often been called the “French
Adam Smith.” With
all due respect, Adam
Smith ought to be called the “Scottish Jean-Baptiste
Say”. If
Say is not the greatest economist in
history, he is at least among their number. He presented the greatest
defense
of Classicism that has ever been made; even modern Classicism in its
noteworthy
offensive against Keynes can do little more than expound and expand
Say’s Law
of Markets. He was
perhaps the first to
employ a deductive model of logic to prove his ideas, rather than
abstractly
presenting theory, but he rejected the temptation of mathematical
economics. He
invented the entrepreneur,
that fourth factor of production so highly acclaimed in the modern
economic
paradigm. He far
exceeded his Scottish
predecessor Professor Smith. The
Age of
the French was off to a mighty good start by all standards and, thanks
to the
contributions of the next French philosopher, would stay that way.
Frédéric
Bastiat was the most illustrious writer of
all the early economists. Not
even the
lucid Jean-Baptiste Say could compare to Bastiat’s literary
brilliance. This
scribe of the Classical School was born
in Bayonne, France, in 1801, and was an orphan at age nine. Both parents apparently
suffered from some
disease of the lungs, an ailment that was unfortunately hereditary
– Bastiat
suffered from poor lungs throughout his life.
He was adopted by his aunt and uncle, who homeschooled him
and trained
him in the family trade (which was, somewhat fittingly, international
commerce.) He
worked as a clerk for his
uncle, then as a farmer (of course, that was wholly unsuccessful due to
his
health) and any other job he could find… until he discovered
books and
journalism. He was
the personification
of journalistic perfection. A
man
inherently weak due to his lungs, Bastiat had the opportunity to study
and
research more than any of his peers, and he took to this duty with
gusto.
During
his journalistic pursuits, he came upon Say’s Treatise
of Political Economy and Adam
Smith’s The Wealth of Nations
and
found his calling. Specializing
in
economic journalism, Bastiat traveled to Paris, where he founded with
other
Classicist-minded journalists “Le libre
échange” – literally: “the
free trade,”
– an economics magazine. It was here he publicized his
greatest works, such as
his brilliant satire “The Petition of the
Candlemakers”. After
the French Revolution of 1848,38 he was
appointed to the National Assembly and became the vice president on the
Finance
Committee. He sadly
died after two years
in office, but not before publish numerous pamphlets and books,
including The Law, Economic Harmonies,
and What is Seen and What is not Seen.
Frédéric
Bastiat had no definitive magnum opus;
rather, he had what might be called “magna opu;”
every one of his works is
eloquent, clear-cut, and often hilarious. He is best known for his two
articles, The Petition of the
Candlemakers and The Broken Window. In the satirical Petition, the “Makers of
generally everything connected with
lighting” address the Chamber of Deputies entreating them to
intervene in
foreign trade on their behalf. It
begins
“Gentlemen: We are suffering from the ruinous competition of
a foreign rival
who apparently works under conditions so far superior to our own for
the
production of light that he is flooding the domestic market with it at
an
incredible low price; for the moment he appears, our sales cease, all
our
customers turn to him, and a branch of French industry whose
ramifications are
innumerable is all at once reduced to complete stagnation. This rival… is
none other than the sun
itself.” With
that, Bastiat launches
into a comical plea for the Chamber of Deputies to order the closure of
all
openings, holes, or fissures to prevent all sources of natural light,
thus
“creating a need for artificial light.”
Hilarious as the Petition
is,
Bastiat continued to drive home the main point of the satire rather
than let it
go by the wayside. The
market is not
limited to a single country; it works on a universal scale. Restricting consumers from
purchasing the
lowest price goods, regardless of its domestic or foreign origin, will
only
serve to encourage the less efficient businesses, while discouraging
the most
efficient.
In the other article, The Broken Window, Bastiat uses a simple illustration to refute the myth that destruction benefits the economy.39 In this short story, a certain Jacques Bonhomme (literally, Jack Good-Guy – Bastiat hadn’t yet mastered the fine art of subtly declaring a protagonist) is a citizen in good standing whose rebellious son breaks the window of a neighbor. Onlookers sympathize with poor Mr. Good-Guy, who now must pay a six-pence to replace the window. However, they started thinking, “What would become of the glaziers if no one ever broke a window?” Some go further to declare “Perhaps destruction does help circulate money, resulting in the encouragement of industry in general!” Bastiat, the omnipresent commentator, does the voice-over, “That is what is seen.” But what is not seen? Bastiat leads the reader back into the story, demonstrating that Jack Good-Guy no longer has his six-pence to spend for a new pair of shoes. He obviously lost. Moreover, the shoe industry lost six-pence of revenue, as Bonhomme’s six-pence intended for new shoes was consumed in replacing the window. Thus, the footwear industry also lost.
Destruction
is not profitable; although the glazing
industry won, the shoe industry lost in equal amount.
They cancel out, leaving only Bonhomme.
Destruction of a six-pence window spoils a
six-pence worth of value. Modern
Classicists can use this illustration to support Jean-Baptiste Say and
the
attack against Keynes. Destruction
and
consumption of utility do not create utility; they are entirely
contrary to
progress.
Frédéric
Bastiat did not limit himself to merely
economics. He was
proficient in
political philosophy as well. In
The Law, Bastiat defined Classicist
political theories. In
short, he
condensed volumes intended for the world of academia in a simple, yet
eloquent
manuscript. What is
the proper place for
government? For
Bastiat, governments
were instituted as a negative defense of human liberty.
Bastiat defined these by writing, “Liberty is
the freedom of every person to make full use of his faculties, so long
as he
does not harm other persons while doing so.”40
Negative
is the operative word; government is to be
used not to encourage a particular “good” behavior,
but rather punish those bad
behaviors. As
Bastiat put it,
governments are established “to prevent injustice from
reigning”. He
did not say to “promote” social or
economic justice, but merely to prevent injustice.
Apart from defining the role of government,
Bastiat also warned against attempts to transcend these legitimate
barriers to
governmental power. As
he wrote, “The
law has been perverted by the influence of two entirely separate
causes: stupid
greed and false philanthropy.”41
Both
greed and “false philanthropy” may be defined as
when the law takes the property of one to give to another. This is greed when it is
done in one’s own
self-interest; when someone deliberately promotes this activity to
government
knowing he will benefit. “False
philanthropy”, on the other hand, is essentially involuntary
charity;
government takes your money and gives it to another.
It is similar to greed, but rather than using
this power in someone’s self-interest, the money is
confiscated to give to
those in poverty. Which
brings up the
question; if these policies would help alleviate the poor’s
suffering, why did
Bastiat still criticize them? He
did so
for several reasons. First,
false
philanthropy does not make sense economically for the receivers. Redistributing wealth
based on lack of it
does nothing to stimulate productivity and self-sufficiency. It actually discourages
it; if you receive benefits
because of poverty, why work harder to become rich and lose those
freebies? Second,
government cannot
create wealth. If
it can give something
away to the poor, first it has to take something away from the rich. In other words, it
punishes people on the
basis of possessing property. To
summarize, false philanthropy decreases productivity at all levels: the
poor
because they receive a “free lunch,” the prosperous
because their hard-earned
wealth is “legally” stolen by the government, which
extinguishes the incentive
to work harder because they know that much of what they gain will also
be
confiscated. Finally,
Bastiat argued
that philanthropy was not the place of government.
Government
is endowed with the unique power of using
force legally. That
is the essence of
government; the only way governments can operate is by the use of force. Taxation is a good
illustration of this
principle. However,
since force inevitably
involves encroachment on the rights of others, it naturally follows
that government
is necessarily an agent of encroachment.
The legitimacy of government is based solely on whether it
uses this
power of encroachment to actually reduce the overall encroachment level. In other words,
governments are legitimate
only if they prevent acts of encroachment – e.g., theft,
murder, arson – that
would otherwise occur in the absence of government.
Not only that, but the encroachment prevented
must be greater than the encroachment caused by the existence of
government. This
principle can be
applied to individual government actions as well.
Taxes are an excellent illustration.
When governments tax, they are by definition
economically encroaching on the property of individuals. This activity increases
the level of
encroachment. The
money taken by
taxation must be used to decrease the social or economic encroachment
naturally
occurring in societies. If
tax funds are
not used to this end, they are illegitimate, what Bastiat called
“plunder” or
“spoilation.”
False philanthropy uses
tax money as charity, and does nothing to decrease the encroachment
level. Therefore,
it is categorically illegitimate.
Frédéric
Bastiat conveys in The Law a sense
of utmost importance in his message.
He was an extraordinarily passionate thinker
with an extremely restrained temper.
Throughout most of his book, he limited himself to merely
systematically
quoting and refuting Nationalistic thinkers.
Occasionally, though, his temper grew above his ability to
contain it,
and he burst loose from his traditionally docile writing style. “Oh sublime
writers,” he wrote, addressing
the French Socialist Party, “Please remember sometimes that
this clay, this
sand, and this manure which you so arbitrarily dispose of, are men!
They are
your equals! The
are intelligent and free
human beings like yourselves!”
Bastiat
restrained himself for several more pages, then his outrage poured
forth, “Ah,
you miserable creatures! You
think you
are so great! You
who judge humanity to
be so small! You
who wish to reform
everything! Why
don’t you reform
yourselves! That
would be sufficient
enough.”43
And
so, with passion, humor, candor, and aspiration to
systematically subdue all economic fallacies,
Frédéric Bastiat earned his place
into economic history. It
is impossible
to scrutinize his life without concluding that he was the greatest
economics
writer of history. Even
Nationalists are
obligated to praise this economic logician.
The New Palgrave
– a modern
economics dictionary written primarily by avowed Marxists –
celebrates Bastiat
as “unrivaled at exposing fallacies.”
Bastiat still stands as perhaps the only economist that
actually has a
sense of humor – a rarity due to economics’
reputation as the “dismal science.”
His two articles present his flair for
journalism. In the
“Petition of the
Candlemakers”, Bastiat expands his opponent’s
arguments to the point where they
no longer function rationally, while in the “Broken
Window” he employs a subtly
persuasive model drawing the reader from arguments for
“destructionism” to arguments
against it.
Frédéric
Bastiat was not merely a brilliant
journalist, but he also used his intellect to perfect the French School
philosophy, preparing it for the harshest wave of Nationalism to come. He attacked protectionism,
tackled the
Nationalist destructionism theory – that destruction and
consumption create
wealth – and distilled impenetrable political tomes into a
single volume The Law.
He extended Say’s logic model by using prose to
communicate deductive
reasoning. Perhaps
even the compliment
paid him by the New Palgrave
–
“unrivaled at exposing fallacies – falls short.
In nearly every philosophical arena, Bastiat was nothing
short of
genius. This
jack-of-all-trades
journalist was a true jack-of-free-trade Classicist.
One
cannot seriously look at the French School
Philosophers and disregard them as irrelevant.
Classicism soon afterwards took its knocks with the
emergence of Robert
Malthus, John Stuart Mill, Karl Marx, Henry George, and other spokesmen
of the
Nationalist School. However,
due to the
overwhelming contributions of these two, Classicism survived and often
thrived
until the Austrian School was founded to advance the Classical movement. Without Jean-Baptiste Say
and Frédéric
Bastiat, this would have been all but impossible.
Even to the modern day, these two maintain
their superiority in Classical thought.
Bastiat’s attack against protectionism in the
“Petition of the
Candlemakers” still remains a compelling argument against
international interventionism,
while his work on positive and negative law has been adopted by the
mainstream
Classicist Party. And
of course,
Classicism couldn’t survive modern Keynesianism without
Say’s Law of Markets,
or Say’s invention of the “entrepreneur,”
or his deductive model of economic
reasoning. Classicism
couldn’t and can’t
exist without the contributions of these two.
If Adam Smith can be called the “father of
economics” for propagating
the works of the Physiocrats to the British Empire, how much more so
should
these two French philosophers be called the “saviors of
economics” for their
completely innovative defense that salvaged Classicism from the
greatest
Nationalist offensive in history?
The
Age of the French was the deciding time in
economic history. It
was when both the
two economic schools – Nationalist and Classicist –
were founded, as well as
when the largest mêlée between the two occurred. The Physiocratic School,
though all too often
ignored, essentially determined economic history from that point on due
to
their contributions in defining Classicism.
The French School went far beyond merely defining
Classicism and its
essential tenets; it formulated a defense for them that lasted in the
face of
Nationalist onslaughts for more than half a century and still maintains
their
utility in modern economics. The
Age of
the French defined economics both for that short period and for the
rest of
human history.
–
Alex Binz, Grade 8
Footnotes
1. The
original usage of the slogan
“Laissez-faire (or, as it was originally,
“Laissez-nous faire”, lit. “Leave us
alone”) is traditionally accredited to a certain Legendre, an
obscure
businessman of northern France.
Jean-Baptiste Colbert, a Mercantilist Minister of Finance,
was
questioning the businessmen of France what he might do to bolster the
economy. Legendre
shouted out this as an
answer, thus cementing his place in history.
2.
John Rae, 1895, Life of Adam Smith,
Macmillan, pg. 329
3.
Francis Macdonald Cornford, The Republic
of Plato, Oxford
4.
Derived from the title of Murray N.
Rothbard’s Man, Economy, and State
5.
This is likely due to the common attitude
that free markets existed and operated to make participants a profit. Many philosophers at that
time considered
free trade to be somewhat like gambling.
In their minds, commerce was a zero-sum game; whatever one
gains the
other loses. Aristotle reasoned that the free market was a form of
legalized
theft. (This is a faulty notion, as it is based on the obsolete concept
that
the market is a zero-sum game. The
Physiocrats
refuted this argument with the introduction of the utility theory of
value.)
6.
The connection between private property and
free trade is straightforward; if a person can own property, he may use
it. If he can do
what he wants to with
his own property, he can sell it.
If he
can sell it, someone else can buy it.
The buying and selling of goods is the essence of the
market. Private
property results in free trade. You
cannot separate the two.
7.
Murray N. Rothbard, 1995, Economic Thought
Before Adam Smith, Hants, Edward Elgar
8.
This is exemplified by politicians such as
the notorious Jean-Baptiste Colbert, the French Minister of Finance,
who
meticulously regulated the number of stitches per inch in the
manufacture of
cloth.
9.
A somewhat humorous anecdote of the results
of “favorable balance of trade” during the reign of
James the First of
England. At this
time, the British
government undertook a policy known as the “Cokayne
project”. Before
all this, most of the cloth worn by
Englishmen was made by a company called the “Merchant
Adventurers”. This
company produced the cloth, shipped it
to the Dutch to be finished, where it was shipped back to England for
sale. James I
withdrew the right of this
cloth monopoly to operate and gave it to Sir William Cokayne, who
formed a
company called the “King’s Merchant
Adventurers”. The
King also prohibited the exports of
unfinished cloth, hoping that the new company would finish the cloth
itself and
then export it out, rather than relying on the Dutch (because that
would mean
less gold…) In
response, the Dutch
monarchy issued a proclamation forbidding the importation of any
English
cloth. Obviously,
England was unprepared
for such a massive change, the project went bankrupt, and King James I
was
forced to revert back to the “Merchant Adventurers”
to supply Britain with
cloth. This may
explain a common
complaint about mercantilism in America; nobody gained!
Except, of course, the King, who collected a
fee for every new corporation. This
also
explains why mercantilist theories on international trade were so
popular among
the European monarchy. (Clarence
B.
Carson, 1988, Basic Economics, American Textbook
Committee.)
10. Karl
Marx used this labor theory of value to
substantiate his Communist agenda.
The
differing treatment of the labor theory of value by Nationalists
illustrates
the key differences between modern Nationalism and Mercantilist
Nationalism. The
Mercantilists used the
labor theory of value to authenticate their idea of forced labor for
the government. The
Marxists used it to “prove” that the
workers were being exploited, and thus they should support an
omnipresent State
to protect them. Both
are Nationalist,
but one is blatantly statist while the other actually attempts to
obscure its
Nationalist agenda.
11. This
movement towards Classicism is especially
evident in America, where all thirteen colonies began protesting the
British
Empire’s Nationalist tendencies.
This,
of course, led to the American Revolution, which changed the course of
world
history.
12. Although
both Turgot and Quesnay were
agrarians, and their theories can be called unrefined, this lack of
sophistication is not without reason.
Turgot and Quesnay founded the Classical School, which has
already been
shown to run contrary to the will of the State.
Remember, if the King didn’t like someone, he
could legally have their
heads. Quesnay’s
and Turgot’s lack of
sophistication is likely due to a focus on saving their lives. Even so, these two
weren’t altogether crude
theorists – they both contributed much to modern economics.
13. “There
have been, since the world began, three
great inventions which have principally given stability to political
societies…
the first is the invention of writing… the second is the
invention of money…
the third is the Tableau Economique, the result of the other two, which
completes them both by perfecting their object…”
(Smith, An Inquiry into the
Causes and Nature of the Wealth of Nations, Prometheus Books,
pg.
464.) The Tableau Economique is hailed as
economics’ first circular diagram.
14. This
last invention of time preference was
forgotten until Eugen Böhm-Bawerk and the Austrian School
revived the concept
in the late nineteenth century. Turgot
had made a discovery half a century more advanced than he was!
15. Notice
possible similarities between Turgot’s Reflections
on the Formation and
Distribution of Wealth” and Smith’s Inquiry
in to Nature and Causes of the Wealth of Nations. Perhaps Smith was trying
to emulate Turgot.
(Imitation is the sincerest form of flattery.)
16. Modern
historians maintain that Cantillon was
murdered by one of his servants who then burned down his house. An unfortunate ending for
the first
sophisticated economist.
17. Richard
J. Maybury, Whatever Happened to
Justice, Bluestocking Press, pg. 56
18. The
labor theory of value was not solely a
Nationalist idea. Adam
Smith himself
advocated this concept, a fact that must be ignored by those who
idolize him as
the “father of modern economics.
19. Gregg
Levoy, This Business of Writing,
Writer’s Digest Books, pg. 131
20. John
Rae, Life of Adam Smith, 1895,
Macmillan, pg. 5
21. Smith’s
eccentricity on international trade –
swinging from free trade to personally enforcing cryptic custom duties
– is
best illustrated by his unwavering commitment, as Scotland’s
custom commissioner,
to set an example for the rest of his country.
When he found that his clothes were foreign-made, he
stripped and burned
his wardrobe! It
remains a mystery how
this Classicist could have made such a sudden, complete about face to
the point
of incinerating foreign-made clothes.
(Mark Skousen, The Making of Modern Economics,
M.E. Sharpe, pg.
30 derived from E. Mossner and I. Ross, Correspondence of
Adam Smith,
Liberty Classics, pg. 245)
22. This
problem is commonly called “Das Adam Smith
Problem”, after Smith’s German critics who scorned
his “contradictory” beliefs.
23. The
Invisible Hand is only mentioned once in
the “Wealth of Nations”.
“Every
individual who employs capital… neither intends to promote
the public interest
nor knows how much he is promoting it… he is in this led by
an invisible hand
to promote an end which was no part of his intention.
By pursuing his own interest, he frequently
promotes that of the society…” (Adam Smith, An
Inquiry into the Nature and
Causes of the Wealth of Nations, Prometheus Books, pg. 351)
24. Dr.
Jay L. Wile, Exploring Creation with
Chemistry, Apologia Educational Ministries, pg. 70
25. Mark
Skousen, The Making of Modern Economics,
M.E. Sharpe, pg. 36
26. It
is impossible to found the entire science of
economics, at any rate. There
are two
competing ideologies; it is impossible to found both.
If Adam Smith was the “father” of
anything,
it would be merely Classicism. But
he is
not even worthy of that; the Physiocrats founded Classicism. Adam Smith merely
propagated it to the
English world before they did.
27. Perhaps
excluding David Ricardo, a Scottish
economist who sincerely tried to bolster Smith’s arguments,
but ultimately
wound up undermining him, and John Stuart Mill, a devout Classicist
until his
friend (and later wife) Harriet Taylor drove him to Nationalism.
28. Perhaps
Etienne Condillac, of the Physiocratic
Age, would have been included in this French School, if he had delayed
the
publishing of his Commerce and Government
for one more month until Smith’s Wealth
of Nations was released.
He was
certainly worthy of this tribute.
29. Jean-Baptiste
Say’s “Treatise on Political
Economy” was also read by Thomas Jefferson, who declared it
“shorter, clearer,
sounder” than the Wealth of Nations”.
(Mark Skousen, The Making of Modern Economics,
M.E. Sharpe, pg.
49) Jefferson also
offered Say a
position at the University of Virginia, but the Frenchman declined,
preferring
instead his Parisian atmosphere.
30. Mark
Skousen, The Making of Modern Economics,
M.E. Sharpe, pg. 93. “Ricardian
vice”
can also be construed to indicate the lack of a concrete model of
logic, or
even a readiness to forgo legitimate reasoning for the sake of
previously held
views. (Not
interpreting data according
to your economic model, but outright intellectual dishonest, ignoring
evidence
that conflicts with your model rather than adjusting your model.)
31. Recently,
the French School deductive model of
logic has fallen into disrepute due in large part to the rise of the
modern
mathematical economics. Paul
Samuelson,
a modern Keynesian textbook-writer, used only formulaic economic
recipes to
describe and “prove” economic concepts in his Foundations
of Economic
Analysis. The
question between
arithmetic, abstractions, or a deductive mixture of both is really a
question
on the nature of economics in general.
Economics deals with human beings, who make subjective
decisions based
on experience and countless other factors impossible to fully calculate. Thus, economic mathematics
is impractical for
genuine economic analysis, because math cannot calculate the human mind. At the same time, abstract
economics is
unfeasible to practical economic study.
By its definition, abstract economic theory cannot be
proven, and
therefore has spelled its own demise.
The French School deductive model, then, is correct by
default; no other
choices are available. It
is easy to see
why this is true. There
are certain
economic concepts, such as human nature, that cannot be proven by any
available
means (in geometry, these are called postulates or axioms.) At the same
time,
there are some less profound ideas that may be proven, but only through
the
usage of the basic axioms (again, these are called theorems or
properties in
geometric terminology.) One
good example
is the properties of monetary inflation.
When the supply of money goes up and the demand for it
stays roughly
equal, the value of money will go down – that is the Law of
Supply and Demand. When
the value of money goes down and the
value of the product about to be exchanged stays roughly equal, then
the price
of the product will go up. This
conclusion is based on the Theory of Exchange Fluctuation (if the value
of one
product in a commercial exchange decreases, the price demanded by the
seller of
the other [in terms of the first product] will increase.) The Theory of
Exchange Fluctuations is ultimately derived from the Law of Comparative
Utility
(every exchange is a barter; that is, two products with differing
utilities to
buyer and seller.) Neither the Law of Supply and Demand nor the Law of
Comparative Utility can be “proven” in the sense of
arithmetic or indisputable
data, but they have been confirmed and established by experience and
common
sense. It is not
arithmetical, nor
abstract. It is
deductive reasoning.
32. It
seems more appropriate to call this
individual an “undertaker”, which is the translated
meaning of Say’s
“entrepreneur”.
33. Jean-Baptiste
Say, A Treatise on Political
Economy, Augustus M. Kelley, pg. 134
34. Say
illustrated his Law of Markets by pointing
to farming. “The
greater the crop, the
greater the purchases of the growers.
A
bad harvest, on the contrary, hurts the sale of commodities at
large.” (Jean-Baptiste
Say, A Treatise on Political Economy, Augustus M.
Kelley, pg. 135) In
other words, the creation of new products
results in the creation of a new market for other products. Supply of X causes Demand
for Y.
35. Say’s
Law is only applicable in the
macro-economic sense. The
key word is
“overall”. One
product may be supplied
more than it is demanded, while another may be demanded more than
supplied. Individual
supplies and
demands are not necessarily equal.
They
may tend to be equal, but it is not inevitable.
36. Steven
Kates, J.B.-Say and the Keynesian
Revolution, Edward Elgar, pg. 212
37. Although
“Keynes’ Law of Markets” is not an
actual economic Law, the phrase is useful for distinguishing between
Keynes’
interpretation of Say and what Say actually said.
38. The
French Revolution of 1848 was actually the
fourth or fifth in a long series of French Revolutions all nearly
identical to
the first. (Monarchy
turns despotic,
republic instituted, monarchs murdered, dictator seizes power, French
Empire
created, Europe counterattacks, French Empire disintegrates, monarchy
reestablished,
rinse and repeat.)
39. The
“Destruction benefits the economy”
manifests itself today in the beliefs that “war is good for
the economy” and
“consumption stimulates economic growth”, the
latter being the target of Say’s
Law.
40. Frédéric
Bastiat, The Law, Foundation
for Economic Education, pg. 51. Samuel
Adams had this same general description of human rights in mind when he
wrote
“The Natural rights of the colonists are… a right
to life, to liberty, to
property, together with the right to support and defend them in the
best manner
they can”. (Richard
J. Maybury, Whatever
Happened to Justice?, Bluestocking Press)
Note that this is a more tangible truism replacing a vague
principle.
41. Frédéric
Bastiat, The Law, Foundation
for Economic Education, pg. 5. Although
both greed and false philanthropy are rationalized by two entirely
different
ideas, they actually have very similar results.
42. Bastiat:
“The purpose of the law is to prevent
injustice” (Bastiat, The Law, Foundation
for Economic Education, pg.
25.) Or, as Thomas
Jefferson put it in
the Declaration of Independence, “That to secure [the right
to life, liberty
and property,] governments are instituted among men.”
43. Frédéric
Bastiat, The Law, Foundation
for Economic Education, pg. 48, 56 respectively
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