Philosophy of Society

Philosophy of Economics (Economic Theory)

Late Classical Economic Theory

Thanks to Smith and Ricardo, the foundational tenets of classical economic theory were established. Their successors were left to address specific issues within economic theory, building upon the groundwork laid by these giants. Like any grand system, the teachings of Smith and Ricardo contained gaps that later classical economists sought to fill.

Swiss historian and economist Charles de Saint-Simon (1773-1842) was among the first to identify the shortcomings of the classical economists' framework. He disagreed with Smith and Ricardo's belief that the free market, through an invisible hand, would resolve all economic problems. While these principles may function in stable conditions, they become detrimental during crises. Economic development can lead to a surplus of goods in the market. When products become overly abundant, they go unsold and unconsumed, resulting in a decline in trade volumes, which in turn precipitates falling wages and rising unemployment. In a free market, the increasing presence of machinery reduces the need for human labor. Thus, modernization may lead not to an accumulation of wealth but to unemployment and poverty, as the impoverished population cannot purchase all that industry produces. If enterprises are unable to sell their goods, they will face bankruptcy. To safeguard against crises, measures such as the prohibition of child labor and restrictions on working age must be implemented, while the state should ensure social protection for the non-working population through pensions, insurance, and welfare.

French thinker Pierre-Joseph Proudhon (1809-1865) took the idea of a free economy to an extreme. He argued that not only should the state refrain from intervening in the economy, but it was altogether unnecessary. If the free market can provide for all needs, then the necessity for a state diminishes. Thus, Proudhon laid the groundwork for anarchist thought, rejecting the need for government. Individuals may unite in free associations to consolidate their efforts, yet for such unions to be meaningful, they must possess basic capital.

British philosopher and economist John Stuart Mill (1806-1873) published several significant works on economic theory, articulating the following ideas:

• Political economy should be purely abstract, rather than normative; it should study how the economy functions, without imposing restrictions. Its subject matter is wealth and the laws governing its increase.
• Wealth consists of that which can be bought and sold in the market. Regardless of how useful or essential an item may be, if no one is willing to purchase it, it cannot be considered wealth. For instance, no one would claim a person rich simply for possessing an abundance of air, as air cannot be sold.
• The economy is governed by laws of production and laws of distribution. The former are absolute and eternal, akin to the laws of nature; they are not established by anyone and cannot be altered. In contrast, the laws of distribution of labor and goods are human constructs, varying from one era and nation to another. If the laws of distribution are sound—best aligning with the laws of production—the economy thrives; if not, it becomes ineffective, reflecting poor organization.
• Mill agreed with Smith that a proper distribution of labor is essential for wealth, but whereas Smith focused solely on labor producing material goods, Mill broadened the concept of productive labor to include work in defense (as the army and police do not produce material goods yet are vital for society), science, spirituality, administration, and more.
• Mill departed from Smith's labor theory of value, asserting instead that the value of a commodity derives from production costs, excluding the principal capital from these costs. Thus, value is comprised of workers' wages and profits. In defining wages, Mill concurred with Ricardo: wage levels are determined by labor demand, meaning that with an abundance of potential workers, wages decrease.
• Mill also aligned with Thomas Robert Malthus's theory, which posits that the population grows in geometric progression while resources increase arithmetically, inevitably leading to a food shortage. To mitigate these risks, Mill argued for the need to limit birth rates.
• Mill acknowledged that, in most sectors, government intervention is unwarranted; however, certain areas require state involvement to develop effectively, such as the army, police, judiciary, science, culture, and infrastructure. These sectors can only thrive with government subsidies, while those that can be regulated by the free market without state interference will develop independently.
• In the realm of social philosophy, Mill advocated for a society where no one suffers from poverty, where no one seeks excessive wealth, and where no one fears being trampled by others in harsh competition.

English cleric, demographer, and economist Thomas Robert Malthus (1766-1834) believed that the global population grows geometrically while the resources of the earth increase arithmetically. This discrepancy indicates a continually widening gap between the planet's population and its resources, which will ultimately deprive humanity of the basic means of survival provided by nature. While natural disasters, wars, and epidemics may partially alleviate this situation, their frequency diminishes with the advancement of civilization. The sole remedy to avoid a state of desperate struggle for survival is rational birth control.

French economist Jean-Baptiste Say (1767-1832) asserted that the production process yields services rather than goods: a cobbler produces shoes and provides this service to a baker, while the baker bakes bread and provides this service to the cobbler. Therefore, the task of political economy is to study the mechanisms of service exchange. According to Say, political economy, as a theoretical science, is essential for both states and individuals, as it enables an understanding of consumer needs and the services producers can provide, thereby shaping the distribution of labor and its products.