Philosophy of Society

Philosophy of Economics (Economic Theory)

Early Classical Economic Theory

Excessive protectionism and a focus solely on trade rather than production stunted economic growth. Meanwhile, advancements in production, large enterprises, and industrialization shifted the center of capital concentration from trade to manufacturing. If mercantilism had served as the economic model during the era that prioritized trade, the age that favored production necessitated a new theory: classical economic theory. This theory is characterized by a complete rejection of protectionism and a demand for absolute market freedom from any state intervention. In the initial phase of classical economic theory, the ideas of William Petty, Pierre Boisguilbert, and the Physiocrats emerged.

One of the founders of classical economic theory was the Englishman Sir William Petty (1623—1687). He was the first to assert that the state should not intervene in the economy but allow it to develop independently. Petty also criticized the mercantilists' stance on money. While mercantilists believed that accumulating as much money as possible constituted national wealth, Petty contended that an excess of money is as detrimental to the economy as its scarcity. When a nation accumulates too much money, it loses value, leading to a lack of work and declining production. Money, he argued, is merely a medium of exchange, not wealth itself.

Pierre Boisguilbert (1646—1714) applied Petty's ideas to the French economy and expanded upon them. For Boisguilbert, as for Petty, money is a means of exchange rather than wealth. He asserted that the primary means of wealth accumulation is not trade but production. Accepting these theses, Boisguilbert further queried whether any form of production creates wealth. His answer was that the primary source of wealth generation is agriculture, as it produces entirely new goods; all other forms of production merely transform agricultural products. The role of the state should be minimal, limited to reducing taxes and refraining from intervention.

Both Petty and Boisguilbert understood that production would generate wealth for both producers and consumers only when products are sold at a fair price. Determining what constitutes a fair price was a question they both sought to answer, arriving at the labor theory of value, which later economists would build upon. There are two types of prices: market price and fair value. Fair value is the price of a commodity equivalent to the amount of labor expended by the producer in its creation. However, each producer operates under different conditions; two producers of the same commodity may spend different amounts of labor on its production. In such cases, the fair price corresponds to the labor costs under the least favorable conditions. Hence, a producer who modernizes their production or improves their skills may expend less labor while earning greater profits. The difference between these amounts serves as their reward for rationalizing and modernizing production. Market price does not always align with fair value; it is determined by the scarcity of the good rather than labor costs. For instance, the price of a diamond does not reflect the labor invested in its extraction or the utility it provides to the buyer but rather its scarcity. The discrepancy between fair value and market price is caused by the presence of money. In a barter economy, people assessed goods solely based on fair value. Consequently, money is viewed as the primary and defining cause of poverty and social injustice, as it creates the disparity between true value and market price.

Early classical economic theory was also developed by the Physiocrats, among whom the most notable were the Frenchmen François Quesnay (1694—1774) and Anne Robert Jacques Turgot (1727—1781). The name of this school means "the rule of nature." Physiocrats posed the question of whether state protectionism or the free expression of natural laws better supports economic growth. They believed that for the economy to flourish, it must be free, allowing natural laws to operate and generate wealth. They considered only those activities that yield profits to be sources of wealth, identifying agriculture as the primary source, since it produces entirely new goods, unlike industrial production, which merely transforms agricultural outputs. A key tenet of the Physiocrats was the belief that, as agriculture derives its products from the land, land itself is the most valuable capital. It is viewed as the sole source of wealth and the greatest capital of the nation.