Evolution of Economic Thought
Classical Economic Analysis After Adam Smith
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During the 40 years that followed the publication of An Inquiry Into the Nature and Causes of the Wealth of Nations, no consistent attempt was made to elaborate or to modify the teachings of Adam Smith.
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The challenge to elaborate on this new economic doctrine originated in the
desire of some social philosophers to adjust economics, now conceived of as an
independent science,
to the principles of refined utilitarian teachings.
The basic person here is Jeremy Bentham (1748-1832)
Bentham was born in London, into a wealthy family. He was a child prodigy and was found as a toddler sitting at his father's desk reading a multi-volume history of England. He began his study of Latin at the age of three. He trained as a lawyer.
Weird Side Note: As requested in his will, his body was preserved and stored in a wooden cabinet, termed his "Auto-Icon," at University College London. The Auto-Icon is kept on public display at the end of the South Cloisters in the main building of the College.
The Auto-Icon has always had a wax head, as Bentham's head was badly damaged in the preservation process. The real head was displayed in the same case for many years, but became the target of repeated student pranks including being stolen on more than one occasion. It is now locked away securely.
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Create all the happiness you are able
to create; remove all the misery you are able to remove. Every day
will allow you, --will invite you to add something to the pleasure
of others, --or to diminish something of their pains. And for every
grain of enjoyment you sow in the bosom of another, you shall find a
harvest in your own bosom, --while every sorrow which you pluck out
from the thoughts and feelings of a fellow creature shall be
replaced by beautiful flowers of peace and joy in the sanctuary of
your soul.
Advise to a young girl, June 22, 1830
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According
to Bentham utilitarian teachings started from certain psychological
propositions believed to be forever
valid.
The essence of these teachings was the maximization of happiness – as the
goal of any public policy.
The idea of utility
– or even utility "maximization" – (increasing ones utility means acting in
one's own self-interest) can be interpreted in two different ways.
1)
Natural identity of interests – (Adam Smith and David Hume)
The individual self-interests of human nature harmonize of their own
accord in a free economy – thus they prescribed laissez-faire…we didn’t
have to worry about directing the self-interests of individuals – because the
social interest would follow naturally.
2)
Artificial identity of interests – (Bentham)
Crime,
for example, is a case in point….self-interested behavior
Government: Therefore—the interest of each individual must coincide with
the general interest
– and it was the business of government to bring about this coincidence of
interest.
This came to be known as utilitarianism.
Bentham basically made little distinction between morals and legislation. He wanted to make the theory of morals and legislation
scientific
as in the Newtonian sense.
Newton’s discoveries in physics were based upon the universal principle of
attraction (gravity) – Bentham’s theory of morals swung on the Principle of
Utility.
Newton influenced the social sciences a great deal – especially with regard to
measuring things!
Welfare Economics:
Thus – if pleasure and pain could be measured – then every legislative
act could be judged on welfare considerations.
Here is where we really have the beginning of welfare economics –
judging legislation based on the costs/benefits to different groups in society!!
But in order to do this Bentham needed a standard of efficiency – so to speak –
or what it would mean for something to be in the “general interest” or in the
“interest of society.”
Bentham: the general interest is measured by the sum of the
individual interests in the community.
This was considered both:
1.
democratic – everyone counted and
2.
egalitarian – everyone counted equally.
This led Bentham to his:
felicific (happiness) calculus summing up of collective pleasures and pains.
1780 – Introduction to the Principles of Morals and Legislation – he
describes the circumstances by which the values of pleasure and pain were to be
measured.
For the community, they consist of the following seven factors:
(1)
Intensity of pleasure or pain
(2)
Its
duration
(3)
Its
certainty or uncertainty
(4)
Its
propinquity (closeness) or remoteness
(5)
Its
fecundity (fruitfulness) – or the chance it has of being followed by sensations
of the same kind
(6)
Its
purity – or the chance it has of not being followed by sensations of the
opposite kind
(7)
Its
extent, i.e. the number of people who are affected by it.
Then Bentham spelled out how to calculate the welfare of society.
“To take an exact account, then, of the general tendency of any act, by which
the interests of the community are affected, proceed as follows:”
Begin with any one person of those whose interests seem most immediately to be
affected by it: and take an
account,
1.
Of the value of each distinguishable pleasure which appears to be
produced by it in the first instance.
2.
Of the value of each pain which appears to be produced by it in the first
instance.
3.
Of the value of each pleasure which appears to be produced by it after
the first. This constitutes the
fecundity of the first pleasure and impurity of the first pain.
4.
Of the value of each pain which appears to be produced by it after the
first. This constitutes the
fecundity of the first pain and the impurity of the first pleasure.
5.
Sum up all the values of all the pleasures on the one side, and those of
all the pains on the other. The
balance, if it be on the side of pleasure, will give the good tendency of the
act upon the whole, with respect to the interests of that individual person; if
on the side of pain, the bad tendency of it upon the whole.
6.
Take an account of the number of persons whose interests appear to be
concerned; and repeat the above process with respect to each.
Sum up the numbers expressive of degrees of good tendency . . . in regard
to . . . the whole: do this again with respect to each individual, in regard to
whom the tendency of it is bad upon the whole.
Take the balance; which, if on the side of pleasure, will give the
general good tendency of the act . . . if on the side of pain, the general evil
tendency with respect to the same community (Principles of Morals and
Legislation, pp 30-31).
Bentham anticipated criticism of the impracticability of his welfare theory.
He knew there were problems, but he wanted legislators and administrators
always to keep the theory in view, “for as close as the actual process of
evaluation comes to it, the nearer it will be to an exact measure.”
Problems or criticisms (they are not mutually exclusive):
(1)
Interpersonal
utility comparisons are impossible.
Bentham recognized a problem with this but said that such comparisons
must be made for social
reform.
(2)
Weighing of qualitative measures is impossible.
Therefore, like many other economists, even of today, he resorted to
money
as the best available measure of utility….which is poor.
(3) The fallacy of composition (what is true for the individual is true for the group) . . .logical fallacy to assume that the collective interest is the sum of the interests of individuals. What does “the collective interest” mean? Does it have meaning at all?
Car safety devices example – supposedly in the "general interest" to have cars with safety devices. Yet individuals do not find it in their interest to have them (perceived costs greater than perceived benefits). Therefore, the general interest is not a sum of individual interests.
(4) This theory basically assumes that the ends justify the means (as long as "social utility" is increased, the means are "good" for society). Not all would agree that that is a moral argument.
On
philosophical grounds Bentham’s view of human nature is essentially
passive – people simply act out of search for pleasure to avoid pain.
There are no “bad” motives or “moral” deficiencies – only “bad” calculations. But education is the key – so
utilitarians
always push education.
We’ll see that James Mill and J.S. Mill were very much influenced by Bentham and
Utilitarianism.
Another important area of study arose after Smith – that of population.
Thomas
Malthus 1766-1834)
The
Principles of Population
The Setting:
Adam
Smith had assumed that the “state of propagation” in the different
countries of the world was regulated in an almost mechanical way by the
“demand for men.”
He pointed out the rapid increase in population in North America, as
compared to the “slow and gradual” increase in Europe and “altogether
stationary” conditions of China.
Toward
the end of the 18th century
– discussion of population problems entered a new phase when we have the entry
of the “utilitarian anarchists.”
This group of writers started their considerations from some
principles of a “natural law” – such as equality of all men and
individual liberty.
From
these premises they derived the view that all evils which had befallen society
were due to restrictions imposed on the free exercise of the natural law – and
especially to the unequal distribution of goods.
They
wanted egalitarian, agrarian communities
where social problems could be alleviated.
Then enters William Godwin: He is considered one of the first exponents of utilitarianism and the first modern proponent of anarchism (absence of government - NOT absence of law). He is also famous (and also attacked) for marrying the pioneering feminist writer Mary Wollstonecraft in 1797 and for writing his candid biography of her after her death. Their daughter, Mary Godwin (later Mary Shelley) would go on to write Frankenstein and marry the poet Percy Bysshe Shelley.
In
a treatise published toward the end of the century – 1793 – An Enquiry
Concerning Political Justice and Its Influence on General Virtue and Happiness
– William Godwin (1756-1836) undertook to disprove that proposition and
to demonstrate that equal distribution of property, especially in land, would
remove the existing barrier to the full operation of competitive forces and open
unlimited prospects of economic progress.
Therefore
- perfectibility of mankind through progress in education and
technology.
Also
included:
Marquuis
de
Marie-Jean Condorcet
(French philosopher 1743-1794) was also much of a utopian anarchist.
Unlike many of his contemporaries, he advocated free markets, free and equal public education, constitutionalism and equal rights for women and people of all races.
He was very good friends with our buddy Turgot. His political ideas, many of them like Turgot's, were often criticized heavily in the English-speaking world, most notably by John Adams who wrote two of his principal works of political philosophy to oppose Turgot and Condorcet's "radical ideas."
He argued that expanding knowledge in the natural and social sciences would lead to an ever more just world of individual freedom, material affluence, and moral compassion.
He thought that history would progress naturally “toward truth and well being.”
Therefore
- perfectibility of mankind through progress in education and
technology.
The
advocacy of such anarchic schemes of social relationships provided the starting
point for the famous Essay on Population in 1798 by Reverend T.R.
Malthus.
Thus
the complete title:
An
Essay on the Principle of Population as it Affects the Future Improvement of
Society, with Remarks on the speculations of Mr. Godwin, M. Condorcet,
and other Writers.
Malthus
basically undertook to collect sufficient material to demonstrate the validity
of the formula concerning the tendency of the population to increase at a
geometrical ratio as contrasted with the increase in the food supply at an
arithmetic ratio.
First:
Food is necessary to the existence of man.
Second:
The passion between the sexes is necessary and will remain nearly in its present state.
Two
propositions:
(Both based on the idea that the human race develops because of one
instinct, the sexual desire.)
This was in some degree in conflict with Smith’s self-interest
proposition – so they kept each other in check.
(1) “Population,
when unchecked, increases in a geometrical progression of such a nature as to
double itself every 25 years.”
This
was not the maximum growth rate or necessarily the actual rate.
But the existence of a potential growth rate of population that advanced
in geometric progression. 1 -
2 -
4 -
8 -16
(2)
Under
even the most favorable circumstances, the means of subsistence (food supply)
cannot possibly increase faster than in arithmetic progression.
1 - 2 - 3 - 4- 5- 6 . . .
Thus
there was a discrepancy
--
So
“the increase of the human species can only be kept down to the level of
the means of subsistence by the constant operation of the strong law of
necessity, acting as a check upon the greater power.”
So what were the actual checks on population growth?
And what can we do about it or which checks should be OK and which aren’t:
ultimate
check on population =
food supply
-- but there are others:
Positive
checks
Preventive checks
(factors
increasing deaths)
(factors reducing births)
War
Moral restraint
Famine
Contraception
Pestilence
(disease)
Abortion
His
theory tells us that population will increase whenever the cumulative effect of
the various checks is less than that of procreation; that it will decrease
whenever the cumulative effect of the checks is greater than that of procreation
– and that will remain unchanged whenever combined effects of the checks and
of procreation are self-canceling.
Subsistence
Economy:
This
all led to the theory of a subsistence economy….since he asserted
the tendency to procreate would dominate the cumulative effect of the checks in
force.
Malthus placed a lot of emphasis on methods of moral restraint as means of controlling the movement of the population.
Criticisms
1.
People’s endeavors to improve their standard of living constituted an
important factor in counteracting the tendency of the population to increase
above the means of subsistence.
(Other
checks – example separate sex and procreation).
2.
Ignored and/or underestimated the increase in agricultural technology.
3. Not much evidence to support his theory.
Can you think of others? What about supporting ideas?