The Classical School


The London Stock Exchange

In the year 1776, David Hume died while Jacques Turgot and Marquis de Condorcet left their government posts.  But, in that same year, the intellectual revolution they had contributed to, the Enlightenment, began to bear its principal fruit.  It was a year of grand treatises.  Adam Smith published his Wealth of Nations, the Abbé de Condillac his Commerce et le Gouvernement, Jeremy Bentham his Fragments on Government and Tom Paine his Common Sense. But the big event of 1776 was America.  The Mercantilist economic policies of the British state had led to a rebellion and now the colonists established a home-grown liberal republican government more-or-less dedicated to laissez-faire and free trade. 

Bigger events were yet to happen.  By 1789, the French State was bankrupt. For the first time in nearly two centuries, the French parliament was called into session, but the bourgeois delegates formed their own National Assembly, put forth their "Declaration of the Rights of Man" and made themselves the supreme rulers of France.  The absolute monarchy and the attending system of aristocratic and clerical privileges was abolished.  In a Paris square in 1793, King Louis XVI was beheaded by his own people, while, next door in Germany, God Himself met a similar fate at the hands of a mild-mannered university professor.  And if anybody in Europe had missed out on these events, Napoleon's armies would soon deliver them to their doorsteps. 

As Europe descended into a long bloodbath, the delicate, optimistic strains of the Enlightenment began fading away and the bold, brash fury of the Romantic era thundered into existence.  "The old century ends in a storm, the new one begins with murder...", murmured the German poet Friedrich Schiller.    

All the while, another storm was brewing underfoot, far more fantastic and destructive of the old social order than even the busiest days of the guillotine or the bayonets of Bonaparte.  It came unannounced, on the backs of vagrants streaming from the English countryside.  A few tinkerers had devised a better way to build a spinning wheel -- and civilization was never quite the same after that.  The Industrial Revolution had begun.

The Industrial Revolution in Britain has been tentatively dated from 1760 to 1832.   The merchants of Bristol and Glasgow morphed into the arriviste industrial capitalists of Birmingham and Manchester. As ever more dark satanic textile mills dotted the landscapes of England, a series of new battles were enjoined --  cotton versus corn, capitalists versus aristocrats, the bourgeoisie versus the gentry, calculation versus custom, machines versus laborers, philanthropists versus the Church.  

The outcome of the battle was predictable. The 1832 Parliamentary Reform Act placed the bourgeoisie firmly in control of the nation.  Defeated at home, the traditional ruling classes withdrew, many of them rebuilding their old privileged lives "east of Suez".  The Poor Laws were overhauled in 1834 throwing rural paupers onto the anonymous mercy of the market. An uprooted and displaced peasantry was gradually transformed into a grim, urban proletariat.  Increasingly miserable and angry, the working classes raised a ruckus on the factory floor and took their struggle onto blood-stained squares and, eventually, into the halls of parliament. 

Written during the Enlightenment, the central messages of Adam Smith's Wealth of Nations (1776) -- laissez-faire, the virtues of specialization, free trade and competition,  etc. -- seemed an appropriate tune for a gentler era.  It did not anticipate the magnitude of the economic and social upheavals that the ravenous industrial era was about to unleash.  Furthermore, it was a muddled and inconsistent book. A new edition, corrected, extended and updated, was needed.  

In the struggle for apostolic succession, three names emerged as strong contenders:  Jean-Baptiste Say, Robert Malthus and David Ricardo.  They all had different visions for political economy after Smith.  Say (1803) wanted to take it back towards the French demand-and-supply tradition.  Malthus (1798, 1820) wanted to add a whole new emphasis, away from the obsessive intricacies of "value" and towards a more macroeconomic (and "dynamic") perspective.  Ricardo (1817) wanted to do Smith all over again, but to do it properly this time.

Out of all three, David Ricardo turned out to be the most successful and influential.  With his 1817 treatise, Ricardo raised economics to an unprecedented degree of theoretical sophistication.  Ricardo's theory, the most clearly and consistently formalized of them all, became the Classical system.  

Classical Pillars

The building blocks of the Classical system, however, were initially set up by Robert Malthus, the first academic economist in England.  His 1798 Essay on Population was the first cannonade of this pessimistic age.  Holding the axiom that natural population growth exceeds economic growth, Malthus's theory implied a terrible "wage-fertility" dynamic, i.e. any increases in per capita income will only induce an increase in population which will dilute it completely.  Attempts to improve the lot of the poor, Malthus argued, are ultimately self-defeating.  This would become the "iron law of wages" of the Ricardian school.

In 1810, in the course of a public debate over the resumption of gold convertibility (the "Bullionist" controversy), Malthus came in contact with the London stockbrocker, David Ricardo and friendship (and competition) was struck up between the two men.  It was during the course of this debate that the Classical perspective on money was developed.   Reversing the Quantity Theory, they argued that the value of money was determined by the inherent costs of producing gold and silver, with the quantity of money adjusting to match it.

The third building block, the differential theory of rent, was introduced in 1815, in the course of a debate on the Corn Laws (prohibiting the importation of grain into England).  The theory of rent had been earlier advocated by Dr. James Anderson, but was independently resurrected by four different authors -- Thomas Malthus, David Ricardo, Edward West and Robert Torrens -- in the space of one month (February, 1815).  The theory proposed that agriculture exhibited diminishing returns to cultivation.  With real wages set by the "iron law", profits and rents were determined residually in the agricultural sector.  As cultivation expanded, they argued, diminishing returns set in, profits would be squeezed and rents grow as a proportion of total income.

The differential theory of rent implied a limit to economic growth.  The Classicals agreed that growth was dependent on capital and capital was nothing but accumulated past savings.  But the Classical school also took it as an axiom that only profit income is saved.  Consequently, the squeeze on profits by the expansion of cultivation would drive savings down and thus put a brake on economic growth.  Ricardo referred to this no-growth endpoint as the "stationary state" of the economy.  They regarded this as inevitable, even while acknowledging that trade and technical progress might postpone the day of reckoning. 

Critical to Ricardo's exposition was to shift the blame for rising prices away from wages.  Wages don't determine prices.  The causality, he insisted, is in reverse: prices determine wages.   The only effect an independent rise in wages will have is to reduce profits -- and even that is temporary, given the Malthusian wage-fertility dynamics.

But, as Malthus pointed out, this left the question "what determines prices?" hanging.  Ricardo set out to answer that question in his Principles of Political Economy and Taxation (1817), which became the fundamental treatise of the Classical School.  Adamant that prices were independent of income distribution, Ricardo eschewed Adam Smith's "labor-commanded" theory of value (to which Malthus was partial) and embraced his "labor-embodied" theory of value instead.  Prices -- at least in the long-run -- are purely determined by labor costs, measured not in terms of money (i.e. wages x labor hours), but in actual physical terms (labor hours alone).  There were some theoretical knots here that Ricardo was unable to undo -- in particular, a problem arose when different industries employed different degrees of capital-intensity -- but he refused to compromise on his axiom that value was independent of wages.  Instead, he placed his faith that the artificial device of an "invariable standard" capital-labor ratio could be  found to "overcome" this differing capital-intensity conundrum and save the labor theory of value. 

It is also in his 1817 treatise, that Ricardo posits his famous theory of "comparative advantage", arguing that so long as nations specialize in goods which they have a lower comparative  (not absolute) cost in producing, there are always mutual gains to be made from trade.  Advocacy of free trade would became a fundamental policy position for the Classical school. 

The Political Economists

For his 1817 effort, David Ricardo acquired a substantial following in Great Britain.  At the core of the "Classical Ricardian" School was the trio of true disciples -- James Mill (1821),  John Ramsay McCulloch (1824 and elsewhere), and Thomas de Quincey (1823, 1824).  They took Ricardo's Principles as gospel and spread the good word.  Mill's entry in the Encyclopaedia Britannica and McCulloch's articles in the Edinburgh Review were particularly its early dissemination.  The wildly popular primers of  Jane Marcet (1816, 1833) and Harriet Martineau (1834) made it accessible to an even wider public.

But they did not really improve on Ricardo's system.  They did not try to "fix" some of the problems with Ricardo, e.g. they ignored the "invariable standard" question almost completely.  Revealingly, the Ricardians sought to de-emphasize its pessimistic aspects and gave it a more optimistic twist, e.g. Ricardo's reservations about technological progress (introduced in the third edition, in 1821) were laid aside and his theory of free trade given central stage.  Mill married Ricardo's economic doctrine with the political philosophy of Jeremy Bentham's utilitarianism, presenting both as "scientific" defenses of free market capitalism.  Benthamites and Ricardians cohabited in the Political Economy Club in London, a monthly conclave which they founded in 1821.

The General Glut Controversy

Of Ricardo's old rivals, Robert Torrens quickly climbed on the bandwagon.  But Robert Malthus took umbrage on several points, in particular the (im)possibility of a "general glut".  Ricardo had taken on board Jean-Baptiste Say's "Law", communicated by James Mill,  that while there may be mismatches of supply and demand, there can never be excess supply of goods in general. In his own treatise, Malthus (1820) disputed this.  But he was swiftly slapped down by the Ricardians and his underconsumption doctrine mothballed for another century or so.  

The response of Jean-Baptiste Say was different. When he was finally translated into English in 1821, it was too late.  The British political economists had already thrown in their lot with Ricardo, so Say reconciled himself to minimizing the differences between their doctrines.  He participated in the general glut controversy, fending off both Malthus and his French counterpart Simonde de Sismondi (1819).  But on the European Continent, many economists continued working in his tradition, notably Karl Heinrich Rau in Germany and Say's own followers in the French Liberal School.  

But Say's approach, setting the labor theory of value to the side and focusing on supply-and-demand instead, was not unknown in England.  The same points had been raised in pre-Ricardian days by the Earl of Lauderdale.  Now, the issue was resumed with a cannonade by Samuel Bailey (1825).  The position was taken up by a small group of English economists, which we have called the Oxford-Dublin school -- Nassau Senior (1827), Richard Whately (1832), William Lloyd (1833) and Samuel Montiford Longfield (1834) -- who tried to move beyond pure criticism to build up an alternative proto-marginalist political economy of their own.  Although advancing independently, John Rae (1834) can be counted as another strand of that development.

The Malthusian Debate, the Wages Fund and Free Trade

The first item in the Ricardian doctrine to fall away was the iron law of wages.  The doctrine had led Classical economists to be embarrassingly associated with the "Neo-Malthusianism" movement of Francis Place (1822) (which included James Mill and his young son, John Stuart Mill among its partisans), advocating artificial contraception as social policy.  Understandably, the Reverend Malthus did not take kindly to this use of his theory and roused himself to write a new edition of his Essay on Population in 1826 which condemned contraception explicitly and emphasized "moral restraint" (i.e. voluntary abstinence) as the social policy to be recommended.  

The appearance of this new edition of Malthus's book afforded an opportunity for Nassau Senior (1829) to launch an attack on the Malthusian doctrine altogether.  He claimed Malthus's wage-fertility dynamics were neither self-evident nor vindicated by empirical data and sneered at the "moral restraint" argument.  Robert Torrens (1829) recanted the doctrine he had earlier upheld.   Michael Sadler (1830) attempted to modify Malthus's doctrine, introducing population density as a complicating factor that might rescue the Malthusian hypothesis on the whole.  But now it was the conservatives' turn to chime in: Thomas Macaulay (1830) and George Poulett Scrope (1831) reviewed and denounced both Malthus and Sadler.  A last-ditch effort to salvage the Malthusian doctrine was attempted by Thomas Chalmers (1832), who tried to explain away empirical irregularities.  But Chalmers was set aside in a series of scathing reviews.  Many, like Scrope (1833), felt the theory couldn't have it both ways. Positing that rising incomes both increases and decreases fertility was evidence that the doctrine was patently defective.  The old Ricardian hand,  J.R. McCulloch (1837), finally buried the Malthusian story, showing by statistical means that fluctuations in the death rate (not the birth rate) were primarily responsible for observable fluctuations in population. 

The vigor of the debate over the Malthusian doctrine can be explained by the impending reformation of the Elizabethan Poor Laws.  The Poor Laws provided minimum income supports for the poor, paid for by parishes out of rates they charged on the community.  Classical economists across the board - e.g .Malthus and Ricardo, through Senior and Martineau - had long called for the wholesale dismantling of the Poor Laws. Some argued on the grounds that any form of income supports merely led, by the Malthusian wage-fertility dynamics, to increased population and misery and thus were of no help to the poor anyway.  Others that these income supports discouraged workers from seeking employment and prevented the creation of a national labor market.  This was the position taken by the Whig political party and their urban capitalist friends.  The rural Tories defended them with the paternalist argument that the wealthy were obliged towards the poor, that ruthlessly abandoning the poor to the anonymous,  individual self-seeking competition of the market would rip apart the "organic" fabric of English society.  So had things stood for a while.  But the Parliamentary Reform Act of 1832 had changed the assignment of parliamentary seats so that the previously underrepresented Whig-inclined bourgeoisie was now in effective control.  The reformation of the Poor Laws was placed at the top of the agenda.

The vigor of the debate over the Malthusian doctrine can be explained by the impending reformation of the Elizabethan Poor Laws.  The Poor Laws provided minimum income supports for the poor, paid for by parishes out of rates they charged on the community.  Capitalists and their friends in the Whig party had complained that these income supports discouraged workers from seeking employment and prevented the creation of a national labor market.  The rural Tories defended them with the paternalist argument that the wealthy were obliged towards the poor, that ruthlessly abandoning the poor to the anonymous,  individual self-seeking competition of the market would rip apart the "organic" fabric of English society.  So had things stood for a while.  But the Parliamentary Reform Act of 1832 had changed the assignment of parliamentary seats so that the previously underrepresented Whig-inclined bourgeoisie was now in effective control.  The reformation of the Poor Laws was placed at the top of the agenda.

The earlier Classical economists, Malthus and Ricardo, had long called for the wholesale dismantling of the Poor Laws on the grounds that any form of income supports merely led, by the Malthusian wage-fertility dynamics, to increased population and misery and thus were of no help to the poor anyway.  It is consequently not surprising that defenders of the Tory position, like George Poulett Scrope, were adamantly anti-Malthusian.  So now that the Malthusian bogeyman was slain, the grounds for the opposition were softened a bit.  J.R. McCulloch preferred to see the system reformed, not dismantled.  Nassau Senior sat on the parliamentary commission that wrote the Poor Law Amendment Act of 1834, replacing "outside relief" of  income subsidies with the "inside relief" of workhouses (those dreadful Dickensian homes where the poor receiving income support could be supervised and put to work).  The amendment created the national labor market the economists and the Whigs hankered for, but it did not do so mercilessly.

But the ignoble exit of the Malthusian doctrine meant the iron law of wages was also gone from the Classical system.  How to explain wages now?  The Ricardians had another theory in the wings -- the wages-fund doctrine -- outlined earlier by James Mill (1821), J.R. McCulloch (1824, 1825, 1826) and even subscribed to by Senior (1830, 1832).  A clarification might be helpful.  The Classicals had all agreed (more or less) that wages were paid out of a previously-accumulated capital fund earmarked for the payment of wages, what they called the "wages fund" (denote it C).  In the long run, C = wL, where w are wages and L is labor supply.  The Ricardian-Malthusian "iron law" of wages had held that the wages fund (C) and wages (w) were given historically, and thus it was labor supply (L) that had to adjust to make the equality hold (i.e.  L = C/w, where L is the dependent variable).  But with the Malthusian doctrine now gone, the theory of the labor supply was gone.  The political economists resolved the problem simply by assuming that labor supply was a constant and having the wage do the adjusting (i.e.  w = C/L, where w is the dependent variable). It is this latter theory that is known as the "wages-fund" doctrine.  Notice that an exogenous increase in C (from capital accumulation) or a decline in labor supply (L) will increase the natural wage rate.

The wages-fund doctrine lent itself conveniently to the debate over trade unions.  After a campaign led by the utilitarian agitator Francis Place and others, the Combinations Acts forbidding trade union activity had been repealed in 1824. Union activity stepped up immediately, worrying bourgeois capitalists quite a bit.  The wages-fund doctrine was used to accentuate those fears.  If union activity pushed wages above their natural, market-clearing (C/L) rate, it would force the amount of labor employed to fall below current labor supply, i.e. unemployment.  Worse yet, adopting Ricardo's axiom,  rising wages would not be passed on as higher prices but rather cut into profits and thereby reduce capital accumulation and growth, thus diminishing the hope that future growth might mop up the unemployed.  The policy implications were clear: if unions held back on their wage demands today, capital accumulation can proceed unhindered and expand the wages fund (C) in the future, and that will help achieve the desired wage gains naturally tomorrow without any attendant unemployment.. 

This conservative implication of the wages-fund doctrine was given great prominence by Harriet Martineau (1834) -- and the wage-fund doctrine was duly accused of being sheer apologism for the capitalist classes.  But some of the other wage fundists were not so quick to bash unions. J.R. McCulloch (1826), for instance, believed that, left to themselves, capitalists had used their monopsonistic positions to keep wages unduly depressed, below their natural C/L level.  Trade unions, he argued, were merely bringing wages up to their "correct" level   

A third area of policy the Classical economists applied themselves to was free trade.  The creation of Corn Laws back in 1815 had brought the Classical school into existence and their assault on them did not relent.  Picked up by Thomas Tooke in his petition of the  London merchants (1820),  free trade became the cause celebre of the age.  The Corn Laws were relaxed in 1828, but not enough for the free trade enthusiasts.  In 1838, Manchester activists Richard Cobden and John Bright set up the Anti-Corn Law League (ACLL) to work for the repeal of the Corn Laws altogether -- thus the term "Manchester School" was coined for the advocates of free trade and liberalism more generally. The Corn Laws were finally repealed by the Peel government in 1846, just as the dreaded potato blight was starting to hit Ireland.  

Enter Mill

By the late 1840s, the record of the Classical school was mixed.  They had successfully fended off Malthus's challenge on general gluts.   But the Malthusian "iron law" had fallen and been replaced by the slippery wages-fund doctrine. But the third great challenge -- on the labor theory of value, by the Oxford-Dublin school -- had not yet been answered properly.  

Did it need to be answered?  Perhaps not.  None of Ricardo's followers had seemed to be overly keen about the labor theory of value.  They seemed rather content to give it a dutiful tip-of-the-hat but then slide into loose demand-and-supply reasoning, without worrying too much about consistency.  The wages-fund doctrine was just one example of this.  Few gave any thought or put any effort into resolving Ricardo's conundrum about the "invariable standard" capital-labor ratio.  By the late 1840s,Classical economics had become a bit of a theoretical free-for-all.   It is no wonder the Karl Marx would call them the "vulgar economists", woolly-minded lightweights in comparison with the refined Ricardo.

It was in an effort to stop economics from becoming a mish-mash of theories that in 1848, John Stuart Mill published his weighty textbook, the Principles of Political Economy.  It attempted to restate carefully and coherently the Classical theory fully and explicitly.  There were few concessions to detractors.  The Malthusian wage-fertility dynamics, moribund for the last twenty years, were resurrected and given their central place again, the wages fund doctrine reduced to merely a suitable theory for the short-run.  Mill was uncompromising on the labor theory of value.  He didn't tolerate the challenges of the Oxford-Dublin school, pronouncing authoritatively that "Happily, there is nothing in the laws of Value which remains for the present or any future writer to clear up; the theory of the subject is complete" (Mill, 1848: III.1).   All the Classical pillars were reinstated and  reinforced.  

Mill's Principles reimposed a dogmatic discipline in the Classical school.  But it also gave dissenters no choice but to go into open rebellion.  

By the 1860s, the Classical School was in a state of siege.  The Wages Fund Doctrine, never very solid, was conclusively demolished when F.D. Longe (1866) and W.T. Thornton (1869) forced J.S. Mill to recant it.  Simultaneously, Thomas Cliffe-Leslie and English Historicists launched their crusade against Ricardian theory -- accompanied, from afar, by the German Historical School.  The Victorian "sages", Thomas Carlyle and John Ruskin, raked the Classical economists over coals in the popular press. Karl Marx (1867) had picked up the Ricardian theory of value and taken it in a different direction. 

The death-knell arrived with the Marginalist Revolution led by William Stanley Jevons (1871), Carl Menger and Leon Walras (1874), which finally provided a clear alternative.  The Classical Ricardian system did not last long beyond that.  Some amount of reconciliation between the two theories was pursued (or at least contemplated) by Alfred Marshall (1890).  Other more radical Marginalists, notably Edwin Cannan (1893), concluded that there was nothing in Classical political economy worth salvaging.  By this time, the Marxians had disengaged from these developments and went off on their own course. 

Alone around the turn of the century, Vladimir Dmitriev (1898-1902) began taking steps towards solving some of the  more intractable knots that remained in Classical Ricardian theory -- in particular, the "invariable standard of value" that Ricardo had groped for.  This was finally accomplished only much later, in Piero Sraffa's remarkable 1960 monograph.  Sraffa called for a rolling back of Neoclassicism and the reinstatement of the Classical Ricardian approach.  This counter-revolution didn't quite happen, but there was a revival of interest and research in the Classical Ricardian tradition which continues to progress today under the banner of the "Neo-Ricardian" school. 




Resources on the Classical Ricardians

19th Century

  • Poor Law Commissioners Report of 1834, Presented to both Houses of Parliament by Command of His Majesty, 1834, by N.W. Senior, E. Chadwick, etc., 1834 [Lib]
  • "British Opinions on the Protecting System", 1830, North American Review [moa]
  • "The History and Moral Relations of Political Economy", 1840, United States Democratic Review [moa]
  • "The Distribution of Wealth: Review of Smith, Malthus and Say", 1847, Southern Quarterly Review [moa]
  • "The Progress of Political Economy: Review of Ricardo and de Quincey", 1848, Southern Quarterly Review [moa]
  • "What Constitutes Real Freedom of Trade?", 1850, American Whig Review [moa]
  • "Repeal of the British Corn Laws", 1851, United States Democratic Review [moa]
  • "Influence of Political Economy on Legislation: Review of Wrottesly, Jones, Senior and Overstone", 1860, North American Review [moa]
  • "Economic Science in America, 1776 - 1876", by Charles F. Dunbar, 1876, North American Review [moa]
  • History and Criticism of the Labor Theory of Value in English Political Economy, by Albert Conser Whitaker, 1904 [bk]
  • "The Development of Ricardo's Theory of Value" by Jacob Hollander, 1904, QJE [McM]
  • "The Development of the Theory of Money From Adam Smith to David Ricardo" by Jacob Hollander,, 1910, QJE [McM]
  • The English Utilitarians by Leslie Stephen, 1900 [McM]
  • The British Economists by John Shield Nicholson, 1907. [McM]
  • The Continental System: An economic interpretation  by Eli Hecksher, 1918 [Lib]


  • An Austrian Perspective on the History of Economic Thought, v.2: Classical economics, by Murray Rothbard, 1995 [mis]
  • "The Quantity Theory: its historical evolution and role in policy debates" by Thomas M. Humphrey, 1974, FRB Richmond, [pdf]
  • "The Ricardo-Malthus Debate on Underconsumption: A Case Study in Economic Conversation" by Fiona Maclachlan, 1999, HOPE
  • "Classical Monetary Theory and the Quantity Theory" by David Glasner, 2000, HOPE
  • Notes on the Theoretical Foundations of Political Economy by Duncan Foley
  • "Economics and Ideology: Aspects of the Post-Ricardian Literature", by Samuel Hollander, 1979, Literature of Liberty [Lib]
  • The Peel Web
  • Victorian Economics: an overview at Victorian Web.
  • British History at Spartacus Educational Website 
  • The Industrial Revolution from Modern Internet History, Fordham
  • Age of Industry by Nancy Mautz
  • "Classical Economics" entry at Britannica
  • Wikipedia


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