Virtue Is More To Be Feared Than Vice

“Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience.” - ADAM SMITH

Adam Smith Philosopher, 1723 - 1790

Adam Smith was born in Kirkcaldy, Fife, Scotland. The exact date of his birth is unknown, however, he was baptized on June 5, 1723. Smith was the Scottish philosopher who became famous for his book, “The Wealth of Nations” written in 1776, which had a profound influence on modern economics and concepts of individual freedom. In 1751, Smith was appointed professor of logic at Glasgow university, transferring in 1752 to the chair of moral philosophy. His lectures covered the field of ethics, rhetoric, jurisprudence and political economy, or “police and revenue.” In 1759 he published his Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work was about those standards of ethical conduct that hold society together, with emphasis on the general harmony of human motives and activities under a beneficent Providence. Smith moved to London in 1776, where he published An Inquiry into the Nature and Causes of the The brilliant British economist David Ricardo was one the most important figures in the development of economic theory. He articulated and rigorously formulated the "Classical" system of political economy. The legacy of Ricardo dominated economic

A

lfred Marshall was the dominant figure in British economics (itself

dominant in world economics) from about 1890 until his death in 1924. His specialty was MICROECONOMICS—the study of individual markets and industries, as opposed to the study of the whole economy. In his most important book, Principles of Economics, Marshall emphasized that the price and output of a good are determined by both SUPPLY and demand: the two curves are like scissor blades that intersect at equilibrium. Modern economists trying to understand why the price of a good changes still start by looking for factors that may have shifted demand or supply, an approach they owe to Marshall. To Marshall also goes credit for the concept of price elasticity of demand, which quantifies buyers’ sensitivity to price (see

DEMAND).

The concept of consumer surplus is another of Marshall’s contributions. He noted that the price is typically the same for each unit of a commodity that a consumer buys, but the value to the consumer of each additional unit declines. A consumer will buy units up to the point where the marginal value equals the price. Therefore, on all units previous to the last one, the consumer reaps a benefit by paying less than the value of the good to himself. The size of the benefit equals the difference between the consumer’s value of all these units and the amount paid for the units. This difference is called the consumer surplus, for the surplus value or utility enjoyed by consumers. Marshall also introduced the concept of producer surplus, the amount the producer is actually paid minus the amount that he would willingly accept. Marshall used these concepts to measure the changes in well-being from government policies such as

TAXATION.

Although economists

have refined the measures since Marshall’s time, his basic approach to what is now called welfare economics still stands. Wanting to understand how markets adjust to changes in supply or demand over time, Marshall introduced the idea of three periods. First is the market period, the amount of time for which the stock of a commodity is fixed. Second, the short period is the time in which the supply can be increased by adding labor and other inputs but not by adding capital (Marshall’s term was “appliances”). Third, the long period is the amount of time taken for capital (“appliances”) to be increased. To make economics dynamic rather than static, Marshall used the tools of classical mechanics, including the concept of optimization. With these tools he, like neoclassical economists who have followed in his footsteps, took as givens technology, market institutions, and people’s preferences. But Marshall was not satisfied with his approach. He once wrote that “the Mecca of the economist lies in economic biology rather than in economic dynamics.” In other words, Marshall was arguing that the economy is an evolutionary process in which technology, market institutions, and people’s preferences evolve along with people’s behavior. Marshall rarely attempted a statement or took a position without expressing countless qualifications, exceptions, and footnotes. He showed himself to be

an astute mathematician—he studied math at St. John’s College, Cambridge —but limited his quantitative expressions so that he might appeal to the layman. Marshall was born into a middle-class family in London and raised to enter the clergy. He defied his parents’ wishes and instead became an academic in mathematics and economics.

thinking throughout the 19th Century. David Ricardo's family was descended from Iberian Jews who had fled to Holland during a wave of persecutions in the early 18th Century. His father, a stockbroker, emigrated to England shortly before Ricardo's birth in 1772. David Ricardo was his third son (out of seventeen!). At the age of fourteen, after a brief schooling in Holland, Ricardo's father employed him full-time at the London Stock Exchange, where he quickly acquired a knack for the trade. At 21, Ricardo broke with his family and his orthodox Jewish faith when he decided to marry a Quaker. However, with the assistance of acquaintances and on the strength of his already considerable reputation in the City of London, Ricardo managed to set up his own business as a dealer in government securities. He became immensely rich in a very short while. In 1814, at the age of 41, finding himself "sufficiently rich to satisfy all my desires and the reasonable desires of all those about me" (Letter to Mill, 1815), Ricardo retired from city business, bought the estate of Gatcomb Park and set himself up as a country gentleman. Egged on by his good friend James Mill, Ricardo got himself elected into the British parliament in 1819 as an independent representing a borough in Ireland, which he served up to his death in 1823. In parliament, he was primarily interested in the currency and commercial questions of the day, such as the repayment of public debt, capital taxation and the repeal of the Corn Laws. (cf. Thomas Moore's poems on Cash, Corn and Catholics) Ricardo's interest in economics was sparked by a chance reading of Adam Smith's Wealth of Nations (1776) when he was in his late twenties. Bright and talkative, Ricardo discussed his own economic ideas with his friends, notably James Mill. But it was only after the persistent urging of the eager Mill that Ricardo actually decided to write them down. He began in 1809, authoring newspaper articles on currency questions which drew him into the great Bullionist Controversy that was raging at the time In that affair, he was a partisan of the Bullionist position, which argued for the resumption of the convertibility of paper money into gold. He wrote a pair of tracts (1810, 1811) articulating their arguments and outlining what has since become known as the "classical approach" to the theory of money.

In these very same tracts, Ricardo also suggested the impossibility of a "general glut" -an excess supply of all goods -- in an economy. This provoked the Rev. Thomas Robert Malthus to respond to Ricardo. The course of this debate continued in their extensive correspondence with each other, culminating in a series of notes Ricardo wrote on Malthus's 1820 Principles (these were later published posthumously as Notes on Malthus). Ricardo stood firm in his support of Say's Law and dismissed Malthus's underconsumption thesis as theoretically impossible. Yet, in spite of their disagreements on economic doctrines, they took to each other personally and fostered a legendary friendship. Ricardo even passed on investment tips to Malthus -- the most famous case being when Ricardo urged Malthus to invest in the bond market in anticipation of a British victory at Waterloo. Ever the conservative parson, Malthus declined. Ricardo, as usual, made a killing. In 1815, Ricardo published his groundbreaking Essay on..Profits. There he introduced the differential theory of rent and the "law of diminishing returns" to land cultivation. Coincidentally, this principle was discovered simultaneously and independently by Malthus, Robert Torrens and Edward West. (more astoundingly, all of them published their tracts within three weeks in February, 1815!) In his 1815 Essay, Ricardo formulated his theory of distribution in a one-commodity ("corn") economy. With wages at their "natural" level, Ricardo argued that rate of profit and rents were determined residually in the agricultural sector. He then used the concept of arbitrage to claim that the agricultural profit and wage rates would be equal to the counterparts in industrial sectors. With this theory, he could show that a rise in wages did not lead to higher prices, but merely lowered profits. Arguably, a proper theory of value was missing in the 1815 tract. In a one-commodity model, this is not an big issue. But, prodded on by Malthus's criticisms, Ricardo realized that in a multiple-commodity economy, for rents and profits to remain residuals, then prices must be pinned down somewhere. In his formidable treatise, Principles of Political Economy and Taxation (1817), Ricardo finally articulated and integrated a theory of value into his theory of distribution. For Ricardo, the appropriate theory was the "labor-embodied" theory of value or LTV, i.e. the argument that the relative "natural" prices of commodities are determined by the relative hours of labor expended in their production. Indeed, he began his 1817 book by criticizing Adam Smith's alternatives -- the "labor-commanded" and "adding up" theories of value -- because, he argued, that made value a function of wages and thus income distribution. For Ricardo, this was untenable. In his vision, value was independent of distribution, and thus only the "labor-embodied" theory made sense. However, Ricardo realized that when the question of capital comes in, a problem arose: specifically, as different industries apply different amounts of capital per laborer, then the rate of profit will also differ across industries. Ricardo understood that if he then assumed that the rates of profit across different industries were equalized (as free competition would imply), then, mathematically, relative prices would now vary with wages -- exactly what he had criticized Smith for! Ricardo realized that the labor theory

of value would only work if the degree of capital-intensity was the same across all sectors, casting doubt on the generality of his cherished theory. Ricardo proposed two ways out of this dilemma. The first was the empirical argument that firms apply capital in a roughly proportional manner to the amount of labor invested. In this case, the resulting prices when profits are equalized would not differ much from the values implied by the LTV. This is what Stigler (1958) has called Ricardo's "93% labor theory of value". The second solution was to find a commodity which has the average capital per worker, so that its price would reflect labor-embodied value and thus not vary with changes in distribution. He called this the "invariable standard of value" . If one can find what this "standard" commodity is, Ricardo argued, then the rest of the analysis is simple. One can, say, change technology, trace the change in value of the standard commodity, and then extrapolate the change in value for all other commodities by the degree to which their capital composition deviates from this standard. Despite his search, Ricardo never found this standard commodity. On his death, an incomplete paper entitled "The Invariable Standard of Value" was found on his desk. Eventually, Karl Marx (1867) proposed one way out of it, but the proper solution would have to wait until Piero Sraffa (1960). A little tripped up on value, Ricardo (1817) pressed on nonetheless. With prices (more or less) pinned down by the LTV, he restated his old theory of distribution. Dividing the economy into classes of landowners (who spend their rental income on luxuries), workers (who spend their wage income on necessities) and capitalists (who save most of their profit income and reinvest it), Ricardo argued showed once again how the size of profits is determined residually by the extent of cultivation on land and the historically-given real wage. He then added on a theory of growth. Specifically, with profits determined in the manner given above, then the amount of capitalist saving, accumulation and labor demand growth could also be deduced. This, in turn, would increase population and thus bring more land, of less and less quality, into cultivation. As the economy continued to grow, then, by his theory of distribution, profits would be eventually squeezed out by rents and wages. In the limit, Ricardo argued, a "stationary state" would be reached where capitalists will be making near-zero profits and no further accumulation would occur. Ricardo suggested two things which might hold this law of diminishing returns at bay and keep accumulation going at least for a while: technical progress and foreign trade. On technical progress, Ricardo was ambivalent. One the one hand, he recognized that technical improvements would help push the marginal product of land cultivation upwards and thus allow for more growth. But, in his famous Chapter 31 "On Machinery" (added in 1821 to the third edition of his Principles), he noted that technical progress requires the introduction of labor-saving machinery. This is costly to purchase and install, and so will reduce the wages fund. In this case, either wages must fall or workers must be fired. Some of these unemployed workers may be mopped up by the greater amount of accumulation that the extra profits will permit, but it might not be enough. A pool of unemployed might remain, placing downward pressure and wages and leading to

the general misery of the working classes. Technical progress, for Ricardo, was not a many-splendored thing. On foreign trade, Ricardo set forth his famous theory of comparative advantage. Using his famous example of two nations (Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England in both commodities. Ricardo's argument was that there are gains from trade if each nation specializes completely in the production of the good in which it has a "comparative" cost advantage in producing, and then trades with the other nation for the other good. Notice that the differences in initial position mean that the labor theory of value is not assumed to hold across countries -- as it should be, Ricardo argued, because factors, particularly labor, are not mobile across borders. As far as growth is concerned, foreign trade may promote further accumulation and growth if wage goods (not luxuries) are imported at a lower price than they cost domestically -thereby leading to a lowering of the real wage and a rise in profits. But the main effect, Ricardo noted, is that overall income levels would rise in both nations regardless. With his 1817 treatise, Ricardo took economics to an unprecedented degree of theoretical sophistication. He formalized the Classical system more clearly and consistently than anyone before had done. For his efforts, he acquired a substantial following in Great Britain and elsewhere -- what became known as the "Classical" or "Ricardian" School. His system, however, was improved very little by his disciples. Perhaps only John Stuart Mill (1848) and Karl Marx (1867-94) added insights of any great weight. Ricardo's theory gradually fell out of favor, and died a slow death soon after the Marginalist Revolution of 1871-74. But research continued in some corners of the world, e.g. Vladimir Dmitriev (1898). Only much later did Piero Sraffa (1960) finally solve the "invariable measure of value" problem and re-ignited interest in Ricardo's theory. The "Neo-Ricardian" research program continues to advance today.. Major Works of David Ricardo Wealth of Nations, which examined in detail the consequences of economic freedom. It covered such concepts as the role of self-interest, the division of labor, the function of markets, and the international implications of a laissez-faire economy. “Wealth of Nations” established economics as an autonomous subject and launched the economic doctrine of free enterprise. Smith laid the intellectual framework that explained the free market and still holds true today. He is most often recognized for the expression “the invisible hand,” which he used to demonstrate how selfinterest guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product. To underscore his laissez-faire convictions, Smith argued that state and personal efforts, to promote social good are ineffectual compared to unbridled market forces. In 1778, he was appointed to a post of commissioner of customs in Edinburgh, Scotland. He died there on July 17, 1790, after an illness. At the end it was discovered that Smith had devoted a considerable part of his income to numerous secret acts of charity.