Chapter 28: Economic Ideas (Part 3: The Classics)

This week we discuss the so-called “Classical” school of economics, and the various ideas about capitalism, free trade, and labor during that period. In particular, we’ll be discussing the lives and works of Jean-Baptiste Say, David Ricardo, John Stuart Mill, the guys who influenced them, and the guys they influenced in turn.

Sources for this episode include:

Allitt, Patrick N. “The Industrial Revolution.” The Great Courses. 2014.

Anschutz, Richard P. “John Stuart Mill: British Philosopher and Economist.” Encyclopaedia Britannica. Last updated: March 2019. https://www.britannica.com/biography/John-Stuart-Mill

Bentham, Jeremy. An Introduction to the Principles of Morals and Legislation. A New Edition. W. Pickering. 1823.

“J.-B. Say: French Economist.” Encyclopaedia Britannica. Last updated: April 2001.

Mill, James. Elements of Political Economy. 3rd Edition. Baldwin, Cradock, and Joy. 1826.

Screpanti, Ernesto and Stefano Zamagni. An Outline of the History of Economic Thought. Translated by David Field. Oxford University Press. 1993.

Spengler, Joseph J. “David Ricardo: British Economist.” Encyclopaedia Britannica. Last updated: August 2007. https://www.britannica.com/biography/David-Ricardo

Full Transcript

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The Era of Classical Economics can really be broken down into two periods.

The first began with the publication of Adam Smith’s Wealth of Nations, which we covered in Chapter 10, and continued through the end of the Napoleonic Wars almost 40 years later. The second period covers the 30-plus years between the end of the Napoleonic Wars and the end of the first Industrial Revolution.

Following Smith, there was a general sense of optimism about the economy of the future. The middle classes of both Great Britain and the Continent sensed a rising tide of industrialization, as well as an expansion of political rights.

And Smith’s fellow philosophers and early economists shared that optimism. There was Antoine Nicholas de Condercet (who wrote about the possibilities of continuous scientific progress), William Godwin (who, while much more radical than these other guys, wrote about the perfectibility of humankind), and Friedrich Soden and Johan Friedrich Lotz (who expanded on and refined Smith’s ideas).

There were also some pessimists – our old friend Thomas Malthus comes to mind, as well as James Maitland Lauderdale (who was one of the first to note that machines could do more than help workers become more productive, they could also just replace workers). Lauderdale’s theory of value stood in stark contrast to Smith’s. Value wasn’t just derived from labor – it came from capital and land too.

But no other economist of this period stood out like Jean-Baptiste Say.

Born into a Protestant merchant family in Lyon in 1767, Say was sent to England as a teenager to study as a trade apprentice in the London area. He returned to France in 1786 and spent a few years working in life insurance and then as a journalist. During the height of the French Revolution he served as a secretary to the Jacobin Finance Minister Étienne Clavière, but after his boss committed suicide – following the fall of the Girondins – Say took over as editor of La Décade, a philosophical, literary, and political journal. It was during those years he began importing the ideas of Adam Smith to the Continent.

Then from 1800 to 1804, Say took up a post in Napoleon’s consular government and dived deep into writing his economic philosophy. In particular, he published his Treatise on Political Economy. But when Napoleon took over as Emperor, Say had had enough, and instead he went into the private sector. With this career move, he imported British textile manufacturing ideas to set up a new cotton-spinning mill at Auchy-lès-Hesdin, where he employed as many as 500 workers (mostly women and children).

After the fall of Napoleon, Say briefly went back to the UK to study the developments of the Industrial Revolution there, before coming back to France and taking over as Chair of Industrial Economy at the Conservatoire des Arts et Métiers for 13 years. He then took a professorship teaching political economy at the Collège de France, where he spent the rest of his life.

Say’s experiences were unique among economists of this era and they no doubt had a profound influence on his views. Say was the quintessential bourgeoisie liberal of the age, favoring radical political reform and a free market capitalist economy. He was a big supporter of Smith’s work, although – like the French Physiocrats a generation before him – Say differed from Smith in two important ways. Number one, he didn’t think all value was derived from labor. He agreed with Lauderdale that value was also derived from capital and land. He called these the three types of “productive service.” Number two, his views of government and markets were much more laissez-faire than Smith’s were.

Among other things, Say understood the law of supply and demand, and probably explained it better than any other previous economist. He also formulated an important theory of entrepreneurship. In fact, Say was the guy who coined the term “entrepreneur.” Basically, the entrepreneur is the person who looks at the demand out there for a certain good, calculates the cost of production, and then determines whether or not it makes economic sense for him to produce the good and deliver it to market.

This feeds into the most important of his ideas, which is known to us as “Say’s Law” from his Treatise of Political Economy. He says, “Inherent in supply is the wherewithal for its own consumption” – or as John Maynard Keynes would later explain it, “Supply creates its own demand.”

Now this was, and remains today, a fairly controversial idea. Say is essentially claiming that there cannot be excess supply in the market. If it’s produced, it will be consumed. To explain, he says that a merchant who receives an income doesn’t keep an excess of his money. He’s going to spend that money – maybe on food or clothing, or on capital investments for this business. And while that’s not strictly true, especially in the short-run, it is generally true in the long run. So he expands on the idea – as he puts it, “products are paid for with products.” He’s arguing that, in a free, laissez-faire market, all things come back to an efficient equilibrium.

Smith believed that self-interest would generally serve the public interest, but he didn’t believe it was an absolute truth. As he saw it, capitalists and bankers were capable of economically destructive greed. But Say’s optimism defined the age. With liberty – political and economic – mankind could be at its most virtuous and most productive.

But the good times didn’t last forever. After the defeat of Napoleon, the economic contractions in Britain and the following Panic of 1825, signaled not all was well. Smith and Say and others may have been optimistic about economic modernization, but now it was becoming clear the transition wouldn’t be entirely positive. There would be new kinds of hardships, new challenges for policy makers, and new intellectual battles to be fought.

And on that battlefield, the new study of economics would be on the front line.


This is the Industrial Revolutions

Chapter 28: Economic Ideas (Part 3: The Classics)


Now, during the Napoleonic Wars, trade between the United Kingdom and the Continent had largely been cut off. But with the emperor’s defeat at Waterloo, Britain would be able to start importing grains from Europe again, and sure enough, grain prices fell.

Now, if you were a laborer, this was great. You wouldn’t have to pay as much to get fed. And if you were a manufacturer, this was great, because your workers wouldn’t come to you asking for a raise in order to afford bread. But if you were a landowner, lower grain prices were a problem. The crops produced on your lands would fetch lower prices, meaning the rents you collected from your tenants would be lower. You’d be making less money.

Well, that landed gentry still dominated Parliament. And in 1815, they passed the Corn Law, keeping prices artificially high. In 1822, they also passed a new Importation Act, which set high tariffs on grain imports. Collectively, these “Corn Laws” came to dominate Parliamentary debate in the early 19th Century as one of the key issues dividing liberal industrialists from conservative aristocrats.

Okay, a time out for my fellow American listeners. “Corn” does not mean the same thing in Europe as it means to us. That’s what you might call maize. “Corn” to them means cereal grains – wheat, barley, malt, rye, etc.


Among the members of Parliament who opposed the Corn Laws was the investor-turned-economist-turned-politician David Ricardo.

Born in 1772, Ricardo was the third son in a Jewish immigrant family from the Netherlands. His father was a banker and, when David was 14 years old, they went into business together, making a fortune in the stock market. At age 21, he married a Quaker woman named Priscilla Anne Wilkinson and – for marrying outside their religions – both families disowned them. They became Unitarians instead, and Ricardo remained a member of the London Stock Exchange, where he continued amassing a fortune.

Then, in 1799, he read The Wealth of Nations, and over the next decade he became obsessed with economic theory. In 1810 he wrote his first economic essay, criticizing the country’s bullionist policies.

But it was the Corn Laws – flying directly in the face of Smith’s free trade ideas – that really set him off. The year the Corn Law was passed Ricardo wrote a pamphlet expanding on Malthus’ theory of differential rent to argue against the bill. Then, in 1817, he published his most important work, The Principles of Political Economy and Taxation.

The year after, he bought a seat in Parliament – because you could do those things in those days – to represent the Irish rotten borough of Portarlington. (We’ll talk about rotten boroughs some other time, I promise.) And while the means with which he took office were (mmmmmm) corrupt, Ricardo was a genuine voice for political and economic reform. Being just about the only person in Parliament who understood economics, he was also fairly popular there with his fellow members, who sought him out to explain these complex issues to them in a straightforward way.

But he only got to serve a few years in Parliament before his untimely death from an ear infection in 1823, at the age of 51. He wouldn’t live to see the Corn Laws repealed, nor would he live to see his ideas come to dominate the field of economics in ways he never could have expected.

Arguing against the Corn Laws, Ricardo reasoned that the country only had so much land for cultivation. If tariffs inhibit the importation of grains, it means more of the national income would go to agriculture and – by extension – to the gentry. These landowners will continue to pay their workers subsistence level wages and capture the rest. But what are they going to do with that money? There’s not much reinvesting to do when you own land. You could buy more land, but that won’t increase the total stock of land cultivated – it just means the land cultivated would change hands.

Meanwhile, industry suffers because industrialists would have to pay their workers more and more to accommodate rising food prices. Profits would fall. And it’s the industrialists who can actually grow production (and the economy) with profits, unlike the landowners.

Ricardo argued it would be better to repeal the Corn Laws, open up free trade with the rest of the world, import cheap grains from other countries and drive down grain prices in the UK. While that’ll suck a bit for the landowners, it will mean greater profits for industrialists who can, in turn, reinvest those profits into increasingly efficient means of production. Then they could sell the goods produced to the UK’s trade partners, cement the country’s status as “workshop of the world” and have enough cash rolling in so nobody ever worried about the price of food ever again.

Now, this opened up a lot of other avenues of economic thought for Ricardo. In part because it opened up several lines of debate with his rival economist, though close personal friend, Thomas Malthus.

Malthus argued that the Corn Laws were acceptable because the landowner’s rents and worker’s wages get spent, feeding back into the economy, whereas the manufacturer’s profits just keep building up in the accumulation of money. But as Ricardo was able to rebut, savings and investment are the same thing. Tapping Say’s Law, he notes that there cannot be an excess of money. Even if you’re not purchasing fixed capital, like machines, you’re going to put your profits into circulating capital. You’re going to buy stocks or bonds or even dump the cash into a savings account where it’ll earn interest. And then it will be used to fund other endeavors elsewhere in the economy. My decision to save results to my neighbor’s decision to spend. While this might sound fairly obvious today, it was a bit of a breakthrough in explaining what constitutes the national income and how an economy can grow.

Their debate also spurred Ricardo to develop a theory of profits and wages so explosive that it left divisions in economic thought still felt to this day.

Like Malthus, Ricardo believed that (in the long-run) the working class would never be able to earn much more than subsistence level wages. This equilibrium for unskilled labor is known as the Iron Law of Wages. Now, this part of Ricardo’s theory is generally ignored today, as we know it’s not true. But the rest of his theory is pretty interesting.

Ricardo noted that when a good is sold, the money earned from it goes to two places: First, to wages (that is, paying the workers who produced it) and second, to profits (amassed by the industrialist). As wages are driven up profits will necessarily fall. To some extent new technologies can help increase the profits, but Ricardo feared that it would usually be in the form of machines that replace workers rather than help the workers increase their productivity.

Ricardo also believed in Smith’s labor theory of value – that all value is derived from labor. I mean, machines can help create value, but who built the machines? People doing labor. Where did they get the raw materials to build said machines? People doing labor.

Then he expanded on this concept, writing,

“The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.”

Did you get that? “…not on the greater or less compensation which is paid for that labour.”

In other words, profits only exist because workers aren’t getting compensated the full amount of the value they created. Almost from the get-go, this idea took on a new name, the “exploitation” of labor.

Now, there’s a lot I’m not telling you about Ricardo’s theories. And in fact, a lot of the other stuff he wrote about is either irrelevant to us today or has been either discredited or so refined it need not be mentioned here. He did not believe in the business cycle, for example – that the economy could grow and crash periodically – a belief the Panic of 1825 (two years after his death) proved wrong.

But for his insights on free trade, capital accumulation, and wages and profits, Ricardo became the single most influential economist of the 19th Century. And he spawned three distinct schools of economic thought.

First was the so-called Ricardians, including James Mill, John Ramsay McCulloch, and William Whewell. These guys loved Ricardo, promoted his work, and expanded on it. The great Robert Torrens can also, arguably, be included in this camp since his theories and methods were so similar to Ricardo’s, although he did reach some very different conclusions.

Second was the Ricardian Socialists, who saw in Ricardo’s writings the reasoning for an anti-industrialist philosophy – namely, when it came to the exploitation of labor. They included William Thompson, John Gray, John Francis Bray, Charles Hall, Thomas Hodgskin, and, arguably, the somewhat fascinating character Piercy Ravenstone.

And finally, there were the anti-Ricardians – guys like Samuel Bailey, Nassau Williams Senior, Samuel Read, George Poulett Scrope, and Samuel Mountifort Longfield. Principally, they were opposed to Ricardo’s labor theory and went to great lengths to undermine it. In their works, they also got hauntingly close to uncovering another economic concept – diminishing marginal utility. But that’s for another time.

After the Wealth of Nations, economics took a rather Smithian orthodoxy for a long time. Save for a few guys like Malthus, it was a pretty classic liberal philosophy. But after Ricardo, economics became fractured. A variety of socialists and neoclassicalists would duke it out over the next – well, now almost two centuries.

Among other things, these guys would all have to deal with the fallout of the Panic of 1825 and subsequent economic meltdowns. And how they responded to these meltdowns differed. But that the meltdowns were happening at all provided the socialists the evidence they needed to rise in influence in the 1830s and 40s. In the long run, capitalists were getting rich while their workers were getting nowhere, while in the short run, economic anxiety was common with occasional bouts of misery.

But one man would try to keep the peace by synthesizing many of the new ideas into a comprehensive and honest economic philosophy.


Let’s back up a few years.

Adam Smith wasn’t the only moral philosopher interested in economics. Among others would be one of Smith’s friends and correspondents, Jeremy Bentham.

Now, if you don’t know much about him (and you should research him if you don’t) you should remember his brother, Samuel Bentham, from Chapter 13: “The Factory System.” Samuel was the Naval officer who worked with Marc Isambard Brunel to launch the high-tech Block Mills at the Portsmouth dock yards.

More importantly, Jeremy Bentham is known for his work advancing a new moral philosophy called Utilitarianism. According to the opening lines of his 1780 book, An Introduction to the Principles of Morals and Legislation, human beings are driven by their desire to increase “utility” – a word he uses to describe “that property of any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness” or to prevent “mischief, pain, evil, or unhappiness to the party whose interest is considered.”

While difficult, perhaps, to measure, utility serves as quantifiable metric for good. And very simply, the goal of policymakers and others should be to create the greatest amount of utility possible for the greatest number of people. And while it certainly has its drawbacks, this is a very practical moral philosophy, free from the religious overtone of tradition, which can be readily adapted anywhere.

This philosophy also spoke to the spirit of the age – the Industrial Revolution – in which industrialists were trying to maximize everything for their good (and by extension, they believed, to the nation and world at large).

Among Bentham’s many students was the industrialist Robert Owen, a sort of socialist-minded capitalist who we still need to talk about. Another was his secretary, a brilliant philosopher and political economist in his own right, James Mill.

James Mill was a big believer in free trade, and Ricardo’s defense of free trade in particular. And he added some clarity to a major concept Ricardo had worked on in that defense.

“If two countries can both of them produce two commodities, corn, for example, and cloth, but not both commodities, with the same comparative facility, the two countries will find their advantage in confining themselves each to one of the commodities, bartering for the other.”

He then goes on a rather lengthy explanation of how many hours it would take to produce each commodity in Poland versus England. This explanation of “comparative advantage” is still used in economics classes today. I’ve sat through them and perhaps you have too.

Among the things Jeremy Bentham and James Mill did together was experiment with the education of James’s son after he was born in 1806. Bentham wanted to see if they could turn him into a genius by subjecting him to a rigorous upbringing. He was taught to read Greek by age 3, Latin by age 8, and to compose poetry and understand advanced theories of mathematics before he was a teenager. To these ends, he would not be allowed to associate with other children (save for his siblings), since they might slow down his development.

Now, the boy would grow up with some, uh, issues. (By age 19 he had a nervous breakdown.) But he did go on to become one of the greatest philosophers of the 19th Century. He would also be the last true leader in the Classical School of Economics: John Stuart Mill.

An avid utilitarian, like his father and Bentham, J.S. Mill believed strongly in creating a just society that produced the greatest good for the greatest number. By his teenage years, he also became enmeshed in the works of their economist friends, the late Adam Smith and David Ricardo. In fact, Ricardo and the Mills would go on walks together to discuss political economy.

When it came to his political philosophy, especially in the book On Liberty, Mill is bold and on-point. His economic philosophy, meanwhile, has been described as trying to please everyone to the point of irrelevance. He described it as “harmonization” and a constant effort to “construct bridges and clear roads” in the works of his predecessors. I, for one, very much think it’s time the world re-visit Mill – especially his 1848 book, Principles of Political Economy.

For one thing, he wanted to harmonize the utilitarian philosophy with the liberal economics of the Classical Era. The laws of production – developed by Smith, Say, and Ricardo – didn’t line up with the laws of distribution. As Mill put it,

“The rules by which distribution are determined are what the opinions and feelings of the ruling portion of the community make them, and are very different in different ages and countries, and might be still more different if mankind so choose.”

So, if society wished to – oh, I don’t know – favor principles of equality, it could re-arrange distribution of income along those lines. Now, that’s not to say he was a socialist – he made sure to make that very clear – but he was certainly sympathetic to socialism (and even more so to trade unionism). Nevertheless, he stuck to the traditional confines of the Classical School.

Among the things that raised eyebrows among his lefty friends, Mill developed an important labor-wage curve. Essentially, he argued that the demand for labor is what it is, and the supply of labor determines the price of it – the wages.

If you take steps to increase wages outside of that market system – such as through collective bargaining or by setting a minimum wage – what it will do is increase unemployment. More workers will enter the labor market, seeking that heightened wage, yet there will be fewer opportunities available because some employers won’t want to pay the higher wages and they’ll leave the market.

Now, in practice, this model isn’t perfect. I mean wages are sticky right? (Don’t worry, we’ll get to Keynes all in good time.) But in broad strokes, yeah – lifting wages reduces job opportunities. Mill caught a lot of flack for this and so he fine-tuned the theory in later years.

But perhaps more importantly, Mill also developed an interesting theory of value. Again differentiating himself from Ricardo, Mill argues that while all value is derived from labor, value also depends on capital. The means of production and the jobs associated with them, require not only wages going to workers, but also profits going to their employers.

I, Dave Broker, am sure I can make a screw, but not without some training on a machine, like the lathes built by Henry Maudslay. Oh sure, that machine was built by workers in a factory, and the iron or steel for that machine was molded by workers in a foundry, and the iron ore for it was dug out by workers in a mine, so yeah, all value is derived from labor. But as a matter of practicality, someone had to pay to build the foundry, someone had to pay to build the factory, and someone had to pay to get the lathe, and if no one is making a profit then no one has the money to pay for any of that stuff.

This was such a profound concept, that even Karl Marx found it necessary to adopt it in his theory of labor exploitation in Das Kapital. But according to Mill, workers do not have a right to the whole of what they produce, because it is not only their labor which contributes to the creation of value, but also the abstinence of some pay so that capital can accumulate.

What’s amazing about this is that just a hundred years earlier, this wouldn’t have been such a big deal. Before the 1750s most workers owned their own tools, operating out of their own little shops. By the 1840s, though, that had changed. Industrialization and capitalism had produced a new status quo for production, and it seemed to be causing as much pain and frustration as it was material well-being.

As you’ve probably noticed by now, the field of economics has been gravitating more and more towards socialism as we go. And by the time Mill wrote his works on political economy – at the end of the First Industrial Revolution – several socialist thinkers and even distinct schools of socialism were gaining ground. In fact, the most famous and, perhaps, the most radical among them, Marx, would publish his Communist Manifesto the same year as Mill’s Principles of Political Economy.

But we’re going to leave the socialists for another time. Instead, we’re going to keep discussing the growth of capitalism. And we’re going to talk about one particular family who accumulated previously unthinkable amounts of capital and used it to spread industrial growth across the globe – the family which is perhaps more responsible than any other for the making of the modern world – the Rothschilds, next week on the Industrial Revolutions.


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Dave Broker