Post-ricardian Developments, Ricardian Economics Models

Before examining J. S. Mill, we shall consider a number of developments that occurred primarily between 1800 and 1850, including revisions of attitudes toward the scope and method of economics and the rethinking of such pillars of classical economic thought as the Malthusian population doctrine, the concept of diminishing returns in agriculture, the wages fund doctrine, and the Ricardian concept of land rent. After this background, we turn to John Stuart Mill, who dominated orthodox theory for much of the remainder of the nineteenth century.

Early Critics of Classical Economics

Many early critics of classical economics have little in common other than their objection to the economics of Smith and Ricardo. Some are often called socialists, but that may be questioned. The unifying theme that binds this diverse group of so-called socialists is their view of the functioning of capitalism in nineteenth-century Western Europe as disharmonious. Most of these early pre-Marxian socialists advocated nonviolent means of eliminating the conflicts in society, although the remedies prescribed vary with each writer. The early socialists indirectly influenced the development of orthodox theory, directly influenced J. S. Mill, and had a major impact, particularly in England, on legislation and on the formation of the labor movement. One of the more careful scholars of the development of economic theory during this period believes that "in fact much of the theoretical development of the 1830s, particularly that related to the nature of profit as a source of income, was the result of a more or less conscious effort to counter the spread of socialist ideology."

These early critics from the left who rejected the assumption of harmony had a diversity of ideas. Some used a labor theory of value to suggest that because labor is the source of value it should receive all or more of its output; some found the working of competitive markets to be undesirable; some recommended cooperatives; some wanted scientists and engineers to play larger roles in the economy through state planning; and some found the distribution of income to be inequitable and proposed various remedies—even suggesting a return to an economy and society less dominated by the new and larger firms, one in which artisans and small firms played larger roles. It is not, therefore, surprising that one of the most important post-Ricardian developments was a response to these attacks on the classical vision of a market society in which the capitalist was a key actor and benefactor. The reaction of the post-Ricardian classicals was to reexamine this vision, to make modifications, and to probe some of the techni­cal parts of the theoretical structure, particularly the theory of interest and profits.
The Scope and Method of Economics

Ricardo, as we have seen, represented a change in the methodology of economics from Smith's loose combination of theory and historical description to abstract, deductive theoretical models. Ricardo seldom addressed himself directly to questions of methodology, but his followers later reached almost complete agreement on the proper methodology for economics. Their new Ricardian methodology regarded economics as a discipline based upon certain simple assumptions. The task of the economist was therefore to correct the logic of the system to make certain that the conclusions followed from the given assumptions. Such a methodological position contributed significantly to the development of economic theory during the post-Ricardian period when conflicts appeared between economic theory and the available empirical data, for it caused econo­mists to ignore the data. Our first task is to examine this methodological position and to demonstrate that, although newly gathered statistical and historical material was contradicting the theory, the majority of economists held to the major Ricardian doctrines.

The two best and most explicit statements dealing with the proper scope and method of economics made during this period were by Nassau Senior (1790-1864) and J. S. Mill. We will use Senior's views as representative of the thinking of the time. In An Outline of the Science of Political Economy (1836), Senior defined political economy as treating "the Nature, the Production, and the Distribution of Wealth."2 The foundations of economics as a science rested on four self-evident principles, and the task of the economist was to develop an accurate terminology and follow the rules of logic so that his or her conclusions followed from these premises. Senior believed that economists had wasted their time in trying to collect more empirical information and should orient their efforts toward improving the logical consistency of economic theory. The economist's premises consist of a very few general propositions, the result of observation, or consciousness, and scarcely requiring proof, or even formal statement, which almost every man, as soon as he hears them, admits as familiar to his thoughts, or at least as included in his previous knowledge; and his inferences are nearly as general, and, if he has reasoned correctly, as certain, as his premises.

Senior's four elementary propositions on which the foundations of economics as a science rested were (1) the principle of rationality, in that people are rational and calculating and will attempt to acquire wealth with a minimum of sacrifice; (2) the Malthusian population doctrine; (3) the principle of diminishing returns in agriculture; and (4) the principle of historically increasing returns for industry. This view of economics as a purely deductive discipline had important conse­quences for the development of economic theory; but before examining these consequences, we shall look at another interesting aspect of Senior's methodo­logical position.

Senior was one of the first economists to maintain unequivocally that eco­nomics should be a positive science. Senior believed that the economist, as a scientist, should take care to distinguish between normative judgments and positive economic analysis. One example of this view in Senior's system is his distinction between (1) the universal laws governing the nature and production of wealth and (2) the principles governing the distribution of income, which reflect the particular customs and institutional structure of an economy. J. S. Mill later made this distinction between the laws of production and distribution a cornerstone of his system. Senior maintained that the economist, as a scientist, can point out the consequences of various economic actions or the possible means to achieve any given end, but that he or she should not leave the field of positive scientific analysis and make value judgments concerning the desirability of any given line of action. Simply stated, the economist should concern himself or herself with what is, rather than what ought to be. The economist's "conclusions, whatever be their generality and their truth, do not authorize him in adding a single syllable of advice."

The acceptance of the methodology that Ricardo practiced and Senior ex­pounded had an unfortunate effect on post-Ricardian economics. The conflict between theory and reality, which became manifest in the 1830s and 1840s, was largely ignored; and although empirical evidence contradicted several basic premises of the Ricardian theoretical system, the economists doggedly adhered to the Ricardian model.

One way to judge the adequacy of a theory is to test its ability to predict. Ricardian economics, although abstract in form, was formulated to provide solutions to significant political and economic questions of the times; therefore, it made certain predictions that could be empirically tested. By comparing these predictions with the empirical evidence, we can uncover the reasons for the decline of Ricardian economics. In order to do this, we will turn to the post-Ricardian treatment of certain basic tenets of orthodox theory: Malthusian population theory, the wages fund doctrine, diminishing returns and rent, and the tendency of the rate of profits to decrease over time.