The Decline of British Classical Political Economy
After Ricardo’s death the task of elaborating on his theory of value and distribution and defending it against the criticisms of Malthus, Torrens, and others fell to his selfproclaimed disciples John Ramsey McCulloch and James and John Stuart Mill.
None of them was up to this task, and the “corrections” and “amendments” to Ricardo’s theory which they introduced amounted in effect to its abandonment, and its eventual replacement with a cost of production theory of value (Meek, 1950).McCulloch, who propagated Ricardian ideas in his Principles of Political Economy (1825) and edited Ricardo’s Works in 1844, posited himself as one of the closest associates of Ricardo and staunchest advocates of his theories. However, in subsequent writings (and in later editions of his Principles) he distorted Ricardo’s theory of value, and thereby paved the way towards the establishment of the notion of “real cost” of J.S. Mill and Alfred Marshall (see O’Brien 1970; De Vivo 1984). Already in the first edition of his Principles McCulloch had introduced the notion of “accumulated labour”, as including a “wage” that remunerated the capitalist for the time during which the embodied labour remained stored up. By means of this device he believed he could render the labour theory of value compatible with the complications, already noted by Ricardo, which arise from different production periods, different ratios of fixed and circulating capital, and different durabilities of fixed capitals. McCulloch’s re-definition of the notion of “embodied labour” provided no solution, but transformed Ricardo’s labour theory of value into a “real cost” theory consisting of wages paid plus profits accrued on advanced wages: “It was precisely this element of “real cost” that gradually acquired importance, to the point of transforming the Ricardian theory of value, related to the difficulty of production, into a theory of the cost of production” (Roncaglia 2001: 220).
In his Critical Dissertation on the Nature, Measure and Causes of Value (1825 [1967]) Samuel Bailey criticized Ricardo’s concept of “absolute value” on the ground that value was something essentially relative that denotes nothing positive or real. The Smith-Ricardo-Malthus search for an invariable measure of value he dismissed as a pointless exercise. Bailey made some valid criticisms of the Ricardian theory of value, which prompted James Mill and McCulloch to reformulations and amendments. The Critical Dissertation also provoked extensive responses from Malthus (1827 [1971]) and from De Quincey (1844 [1970]). The importance that is sometimes attributed to Bailey’s Critical Dissertation as a landmark contribution to value theory owes much to the fact that Torrens had declared, in 1831, that this treatise had been decisive for the abandonment of Ricardo’s doctrines. However, this was as much an overstatement as the claims that have been made later by Seligman and others, who depicted Bailey as a precursor of “modern”, that is, marginal utility value theory and as an early exponent of the abstinence theory. Bailey’s remarks on the causes of value fell far short of anything that could be called an alternative theory, and indeed did not get beyond the vague suggestion that a theory of value must take into account “mental states” and “estimations”. If Bailey contributed to the abandonment of the surplus approach and its gradual replacement by the marginalist approach, then this did not so much concern the demand side, but rather the supply side. More specifically, with his division of reproducible commodities into those which can be supplied at constant costs and those which are only producible at increasing costs, Bailey introduced the idea of a relationship between cost and quantity produced. It was this idea which eventually paved the way to Marshall’s attempted reconciliation of “cost of production” and “marginal utility” in the determination of prices (see De Vivo 1984: 133-5).
Subjectivist elements were also introduced into the theory of value by authors such as Nassau W. Senior and Mountifort Longfield; and various other writers, such as Thomas Read and George Poulett Scrope, advocated cost of production theories in some form or another. A combination of utility and cost of production elements in price determination was proposed also by Thomas De Quincey, who in 1824 had published an excellent exposition and defence of Ricardo’s theory of value and distribution, entitled “Dialogues of three templars on political economy”. However, in his later work, The Logic of Political Economy (1844), he made some decisive steps towards a theory of prices based on demand and supply and a subjective theory of value. On the one hand, he stressed the role of utility in the determination of the value of scarce, non-reproducible commodities. On the other, he introduced the concept of “actual prices”, and thereby deprived the Smithian notion of “market prices” of the role previously assigned to it. He thus paved the way to the Marshallian conceptualization of different levels of analysis in terms of the length of time allowed for adjustment processes, with utility and cost of production, or demand and supply, both acting simultaneously on the determination of prices, with the former being of primary importance in ultra-short and short periods, and the latter in long periods.
John Stuart Mill completed the abandonment of the surplus approach to the theory of value and distribution of the British classical political economists. His Essays on Some Unsettled Questions in Political Economy, written in 1829-30 but published only in 1844, contained an essay on the theory of foreign trade (Mill 1844a [1967]), in which he introduced the concept of “reciprocal demand”, and an essay on profit (Mill 1844b [1967]), in which he set out to correct Ricardo’s formulation of the wage-profit relationship. Mill’s reciprocal demand theory was later taken up by Marshall in the elaboration of his theory of value.
In his Principles of Political Economy (1848 [1965]) Mill then merged Senior’s theory of abstinence with the Ricardian theory of distribution. Mill also introduced the wage fund theory (which he later famously recanted) and in his value theory transformed Ricardo’s theory into a cost of production theory. Moreover, he introduced the distinction between commodities the supply of which is fixed, those of which the supply can be increased without an increase in costs, and those of which the supply can only be increased at increasing costs, and suggested that the classical theory applies only to the second class of commodities, whose natural prices are given by their costs of production, which consist of wages, profits (considered as remuneration for abstinence) and rent (considered as an opportunity cost).Christian Gehrke
See also:
Balance of payments and exchange rates (III); Pierre Le Pesant de Boisguilbert (I); Capital theory (III); Richard Cantillon (I); French classical political economy (II); Thomas Robert Malthus (I); Karl Heinrich Marx (I); John Stuart Mill (I); Money and banking (III); William Petty (I); Francois Quesnay and Physiocracy (I); David Ricardo (I); Adam Smith (I); Piero Sraffa (I); James Steuart [James Denham-Steuart] (I); Robert Torrens (I); Anne-Robert-Jacques Turgot (I); Value and price (III).