Alternatives to classical economics

Mill’s slightly younger contemporary, Karl Marx (see MARX AND MARXISM), was without question one of the most important writers of the nineteenth century. He spent many years working on economics but, paradoxically, had much less impact on thinking about economics than (say) politics or history. He emphasized the massive transformation that had been brought about by industrial capitalism, but the analytical framework of his economics looked back to Ricardo at a time when even Mill’s updated version of the classics was beginning to crumble.

Marx put the labour theory of value at the heart of his analysis, treating it not as a theory of price but as a method of calculation independent of market prices. Value, to him, was defined by the labour required in production, while prices were a converted or distorted reflection of values. This allowed him to argue that labour, and labour alone, is (by definition) the source of value, so if wages fall short of the value produced (as they must) this represents ‘exploitation’ of labour to produce ‘surplus value’. All non-wage incomes have to come out of the surplus value generated by productive workers. Marx played down the role of rent and rejected the Malthusian population mechanism but he retained the subsistence wage of the classics, so his theory of surplus value was essentially the same as Ricardo’s, with a different terminology and a new political slant. He too predicted a falling rate of profit, but gave a different (and, it is now clear, invalid) explanation. Where the classics thought declining profits would lead to a stationary state, Marx foresaw the revolutionary overthrow of the system.

The first volume of Marx’s Capital appeared in 1867. Taken on its own it seemed to rely on a wholly dogmatic labour theory of value. The third and final volume, which could be seen as meeting some of the obvious objections by linking labour values to ‘prices of production’ (Smith’s natural prices), was never finished and was assembled by Engels for publication in 1894. By that time economics had moved on, and Marx’s economics had little impact outside what was, at that date, a very small coterie of dedicated Marxists. Marxism came to have a huge political and intellectual impact in the twentieth century, but Marx’s economic analysis only played a very minor role.

A quite different and ultimately more successful approach emerged in the middle years of the century in the work of a succession of French engineers, or scientists with an engineering training. The most important were Antoine Augustin Cournot and Jules Dupuit. Starting in 1838, Cournot developed a mathematical analysis of supply and demand in competitive industries, together with a theory of monopoly (one supplier) and of oligopoly (a few sellers). The last of these is still the dominant theory today, and is universally known by his name. A little later Dupuit put forward an analysis of the gains

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from public projects, such as the building of a bridge, and developed many key ideas of modern welfare economics in the process. In retrospect, these writers, with others such as the German Heinrich von Thünen, pointed the way to later developments, but they had little impact at the time, perhaps because they were isolated individuals who made little attempt to convert others and because their work was difficult and mathematical. One might say that they adopted a style appropriate to the professionalized academic economics of the twentieth century but before there was a professional audience to address.

Alternatives to classical economics