The Analytical Method of the Classical Economists

The classical economists were keen to unravel the economic laws governing the emerg­ing capitalist economy, characterized by the stratification of society into three classes: workers, land owners, and the rising class of capitalists; wage labour as the dominant form of the appropriation of other people’s capacity to work; an increasingly sophisti­cated division of labour within and between firms; the co-ordination of economic activ­ity via a system of interdependent markets in which transactions are mediated through money; and ongoing technical, organizational and institutional change.

The method of the analysis adopted by the classical economists is known as the method of long-period positions of the economy. Any such position is the situation towards which the system is taken to gravitate as the result of the self-seeking actions of agents, especially capitalists, thereby putting into sharp relief the fundamental forces at work. In conditions of free competition, characterized by the absence of marked barri­ers to entry into and exit from the various markets, the resulting long-period position is characterized by a uniform rate of profits (subject perhaps to persistent inter-industry differentials reflecting different levels of risk and of agreeableness of the business; see Kurz and Salvadori 1995: ch.

Alfred Marshall (1890) had interpreted the classical economists as essentially early advocates of demand and supply theory, with an undeveloped demand side. Sraffa challenged this interpretation and the underlying continuity thesis in economics, which was later dubbed “Whig history” of economics by Paul A. Samuelson (1987). As Sraffa showed, the classical economists’ approach to the theory of value and distribution was fundamentally different from the later marginalist approach. It explained profits in terms of two data: (1) the system of production in use and (2) a given real wage rate (or, alternatively, a given share of wages). Profits (and rents) were thus conceived of as a residual income. Whereas in marginalist theory wages and profits are treated symmetri­cally, in classical theory they are treated asymmetrically. Also, whereas in marginalist theory prices are scarcity indexes of goods (and of factor services), in classical theory they support the given distribution of income and only some of them reflect the scarcity of the thing under consideration. That is, while the rent of a particular kind of land typi­cally expresses the scarcity of that kind, profits do not express the scarcity of “capital” in general or of particular capital goods. In contrast to land, capital goods are reproducible and therefore it makes no sense in a long-period framework, which was also adopted by major marginalist theorists, to apply the principle of scarcity to them. On a still deeper methodological level, the divide between the classical and the marginalist authors could hardly be more pronounced: while the classical authors took the economic system to exist prior to and independently of the single agent and actually exert a considerable influence upon the latter as worker, capitalist or proprietor of land, the marginalist authors advocated “methodological individualism”, which takes a set of optimizing agents to exist independently of the system as a whole and where the agents shape the system rather than being shaped by it.