"[A]lthough Adam Smith's great work professed to deal with the causes of the wealth of nations,...from the point of view of the history of theoretical economics, the central achievement of his book was his demonstration of the mode in which the division of labour tended to be kept in equilibrium by the mechanism of relative prices -- a demonstration which...is in harmony with the most refined apparatus of the modern School of Lausanne The theory of value and distribution was really the central core of the analysis of the Classics, try as they might to conceal their objects under other names."
(Lionel C. Robbins, Essay on the Nature and Significance of Economic Science, 1932: p.68-9).
(A) The Classical World
(B) The Place of the Classical Paradigm
(C) The Notion of Classical General Equilibrium
(A) The Classical World
Economics, Alfred Marshall tells us, is the "study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being" (Marshall, 1890: p. 1). This rather loose definition allows for many paradigms for economic theory. A paradigm employs a particular "vision" of the subject of study, and by thus defining it, it simultaneously provides the concepts by which it is studied.
One of the central paradigms that dominated 19th Century economics was that of the "Classical" school of political economy, which flowered principally in Great Britain. The Classical school is mainly associated with figures such as Adam Smith, David Ricardo, John Stuart Mill, Karl Marx and their contemporaries. This is in contrast with the "Neoclassical" paradigm which emerged in the 1870s after the "Marginalist Revolution" of William Stanley Jevons, Carl Menger and Léon Walras, and has since risen to dominate modern economics almost exclusively.
The "Classical" school is sometimes called the "Surplus" school - in reference to one of its central organizing concepts - or, occasionally, the "Ricardian" school - in reference to its greatest and most influential theorist. In his Principles of Political Economy and Taxation (1817), David Ricardo systematically laid out the main theoretical propositions of Classical economics. Compared with Ricardo's achievement, the other economists associated with the Classical School could be arguably conceived as "mere boats" beside the Ricardian "ocean liner".
We should note, however, that, properly speaking, the "Classical" school stretches back much further, at least to 18th Century France. We find many of its features in the remarkable work of Richard Cantillon (1755) and the Physiocrats - notably, François Quesnay (1759) and A.R.J. Turgot (1766). The French system was imported into the English-speaking world by Adam Smith in his famous Wealth of Nations (1776), which has been acknowledged by many as the "beginning" of economic theory.
Yet Smith's famous treatment, as that of most of his contemporaries, are more confused, less systematic and far less abstract and thus nowhere near as monumental a theoretical achievement as Ricardo's 1817 book. Some would argue that this is lamentable; that by shunting economics into its strict, theoretical grooves and away from its earlier loose, somewhat historical, semi-empirical, intuitional basis by Smith and others, Ricardo is, in effect, "where economics went wrong".
Nonetheless, for good or ill, it can hardly be disputed that David Ricardo was the pre-eminent theorist of Classical economics. Ricardo's shadow dominated virtually all of British 19th Century economics. James Mill (1821), John R. McCulloch (1825), Thomas de Quincey (1844) and, perhaps most influentially, John Stuart Mill (1848) were the great propagators of the Ricardian school in Great Britain. Henry Fawcett (1863), John E. Cairnes (1874) and Henry Sidgwick (1883) kept the Ricardian flame alive nearer to the end of the century, in the teeth of the Marginalist Revolution. And, of course, we must remind ourselves that a particularly famous poor German exile in London, Karl Marx (1864-1894, 1910), was a proud Ricardian through-and-through -- even though he remained an implacable critic of Mill and the other Ricardians.
The dominance of the Ricardian school in Britain does not mean it was unchallenged. Ricardo's friend and competitor, T. Robert Malthus (1820) and, later, William Nassau Senior (1836) and the members of the "Oxford-Dublin" school, although Classical to some degree, remained less-than-enthusiastic about the Ricardian system. The English also possessed their own "Historical School", which included such fiery figures as Thomas Cliffe Leslie, who were overtly hostile to Ricardianism. Other British personages of the day, such as Thomas Carlyle and John Ruskin, perceived Ricardian economics (indeed, economics as a whole) as nothing less than a lamentable curse on humanity.
In contrast, the French and Germans, who took their cues more from Jean-Baptiste Say (1803) and Karl Heinrich Rau (1826), eclectic followers of Smith, were less dominated by the Ricardian specter. Thus it is perhaps no surprise that it is on the European continent that we find the greatest departures from the Classical school, e.g. in the work of Frenchmen Augustin Cournot (1838), Auguste Walras (1831, 1849) and Jules Dupuit (1844) and the Germans Johann Heinrich von Th・en (1826-63) and Hermann Heinrich Gossen (1854). Furthermore, German economics was dominateed by the Historical School initiated by Friedrich List (1841) and Wilhelm Roscher (1843), which had very little sympathy for Ricardianism and made it a point to confront it wherever it appeared.
After the Marginalist Revolution of 1871-74, Classical theory beat a steady retreat. Fawcett, Cairnes and Sidgwick continued to defend the old doctrine in Britain, and, in spite of the efforts at a reconciliation by Alfred Marshall (1890), the gist of the Classical vision effectively disappeared. It lingered somewhat in Marxian circles on the European continent -- although we must remind ourselves that for the first half of the 20th Century, Marx the economist was played down in favor of Marx the historian, political scientist, sociologist, philosopher and prophet. The great exceptions in the interwar period was the work of the Kiel School (Adolph Lowe, Wassily Leontief, etc.) during the interwar period, which drew its inspiration from Marxian scheme of extended reproduction. Michal Kalecki's work on cycles and crises in the 1930s must also be mentioned as carrying on the "Classical" tradition. The Ricardian system was only really resurrected in 1960, in the long-gestating monograph by Piero Sraffa, The Production of Commodities by Means of Commodities. The "Neo-Ricardian" school that emerged in the 1970s has attempted to consolidate Sraffa's "Classical revival".
Most history of economic thought textbooks cover Classical theory. These are too many to enumerate fairly. An unrepresentative sample of particularly notable performances are the textbooks of Schumpeter (1954), Blaug (1962), Mitchell (1967) and Pribram (1983). More formal ones include Brems (1986), Negishi (1989) and Niehans (1990); more accessible are those of Spiegel (1971), Hunt (1979) and Landreth and Colander (19??). There are also several texts which deal exclusively with Classical theory in more detail. These include, with differing degrees of formality, Blaug (1958), Dobb (1973), Sowell (1974), Eagly (1974), Walsh and Gram (1980) and, notably, Kurz and Salvadori (1995). Along somewhat different lines, the wonderfully-written semi-biographical treatment of the Classical economists by Heilbroner (1953) is very much worth reading.
(B) The Place of the Classical Paradigm
Although we have referred to a "Classical paradigm", it was not always accepted that Classical economics is a different paradigm from the Neoclassical one, or at least as distinct as we make it out to be. It might be therefore worthwhile to make a note on the place of Classical economics in the history of economic doctrines.
Naturally, the Neoclassical revolutionaries were highly critical of the Classical doctrines and emphasized the fundamental and irreconcilable differences between the theories (e.g. W.S. Jevons, 1871: p.xliif.; Léon Walras, 1874: Ch. 38). This view caused considerable discomfort, particularly in Great Britain. After all, the Marginalist Revolution proposed a displacement of the British Classical tradition with what was more or less generally regarded as a Continental European - particularly French - doctrine. As William Stanley Jevons wrote in the preface to the second edition of his pathbreaking treatise:
"The conclusion to which I am ever more clearly coming is that the only hope of attaining a true system of Economics is to fling aside, once and for ever, the mazy and preposterous assumptions of the Ricardian School. Our English Economists have been living in a fool's paradise. The truth is with the French School, and the sooner we recognize this fact, the better it will be for the world."
(W.S. Jevons, 1871: p.xliv-xlv).
Such an assessment, of course, would alarm many British Neoclassicals, such as Alfred Marshall. Consequently, in order to give a semblance of "British" continuity from Classical through to Neoclassical theory, Marshall (1890) and his cohorts were more willing to see room for a reconciliation between the doctrines. As he writes:
"[Jevons's] success was aided even by his faults. For under the honest belief that Ricardo and his followers had rendered their account of the causes that determine value hopelessly wrong by omitting to lay stress on the law of satiable wants, he led many to think he was correcting great errors; whereas he was really only adding very important explanations."
(A. Marshall, 1890: p.84-85).
Thus, in Marshall's view, there was no "Marginalist revolution" as such. Instead, the entire Neoclassical episode could be seen one as a change of emphasis, away from the supply side and towards the demand side, which, he believed, lurked in the Ricardian doctrine, however underdeveloped. The Marshallian line stresses a sense of congruence between the old Classical theory and the new Neoclassical one.
The conceptual division between Classical and Neoclassical theory was resurrected in the scathing critique of the old Classical school initiated by Edwin C. Cannan (1893) and reiterated by more radical Neoclassicals such as Frank H. Knight (1935). These Neoclassicals simply regarded the Classical theory as inherently and irredeemably wrong - "the theories of production and distribution arrived at in the first half of the nineteenth century must be visited with almost unqualified condemnation" (Cannan, 1893: p.302). For Cannan and his cohorts, there was no space for Marshallian reconciliation. In their view, the Neoclassicals did not merely "improve" upon certain aspects of the older Classical theory -- there was nothing in it worth saving. The Classical and Neoclassical doctrines were incompatible bedfellows, with the former being entirely wrong and the latter entirely correct.
Those sympathetic with the Classical doctrine, such as Piero Sraffa (1951) and Maurice H. Dobb (1973), were willing to emphasize the irreconcilable differences between Classical and Neoclassical theories, albeit with a different purpose in mind. Sraffa and Dobb saw Classical and Neoclassical theories as "competing paradigms" which had their own internal consistency and logic which could not be reconciled. Consequently, because they were different, then the Classical doctrine could not be said to have been proved "wrong" or have been "improved upon" by the Marginalist Revolution. Rather, they argued that it was merely "sidelined" by the economics profession because of fashion, ideology, etc. For Sraffa and Dobb, Classical theory was still a separate, coherent and even useful paradigm on its own.
One suggested implication of the Sraffa-Dobb interpretation was that there remained enough room for a "resurrection" of Classical theory as a competing theory in modern economics. This revival was itself initiated by Piero Sraffa in his Production of Commodities by Means of Commodities (1960). In essence, Sraffa's formalism was actually not very different from the input-output economics of Wassily Leontief (1941) and, perhaps more significantly, John von Neumann (1937). But while Leontief had emphasized the practical aspects of his system of equations and made very little of its theoretical significance, Sraffa (1960) went in the opposite direction, emphasizing its fundamental theoretical implications directly in the light of specifically Ricardian themes.
This effort was taken up by the followers of Sraffa, or "Neo-Ricardians", closely associated with the Cambridge University (UK) such as Piero Garegnani (1960, 1976), Luigi Pasinetti (1960, 1974, 1975), Alessandro Roncaglia (1978) and Heinz Kurz and Neri Salvadori (1995). We should note that the "Cambridge Capital Controversy" that raged in the 1960s over an ostensibly technical point in capital theory, took on greater theoretical dimensions precisely because of its implications as a test-run for the Classical-Neoclassical competition (see Geoff Harcourt (1973) for a review sympathetic to the Neo-Ricardians and Frank H. Hahn (1975, 1982) for a rather unsympathetic one).
In spite of this "resurrection" motive, the Sraffa-Dobb interpretation of the Classical-Neoclassical division nonetheless gained general acceptance among modern Neoclassical economists (e.g. Kenneth J. Arrow and David Starrett, 1973). Some, such as George J. Stigler (1952, 1958) disputed some of the points made by Sraffa-Dobb, but did not challenge the general gist of their thesis. The great exception was Samuel Hollander (1979, 1982), who, by characterizing Ricardo as a mere forerunner of modern Neoclassical theory, effectively attempted a "Marshallian reconciliation". A good part of the subsequent debate over the Hollander interpretation is conveniently collected in Caravale (1985).
A second implication of the Sraffa-Dobb interpretation relates to the work of Karl Marx. Indeed, after a half-century of banishment from economics, Marx had only been reinstated into his rightful place as an economic theorist in his own right by Paul M. Sweezy (1942) and Robert L. Meek (1956). The Sraffa-Dobb interpretation, however, threatened to relegate him to the fringes of economics once again -- this time by classifying him as "just another Ricardian". In particular, as Ian Steedman (1977) pointed out famously, Sraffa's work implied that Marx's cherished "labor theory of value" was actually merely a special case of Ricardo's more general theory of value. This issue has become an important point of contention between Neo-Ricardians and Marxians.
Interestingly, there has been a sustained attempt by the modern Neo-Ricardian school to generate an even more complete research program by marrying the Classical theory of value and distribution to John Maynard Keynes's (1936) theory of effective demand. Indeed, the earlier Cambridge Keynesian research program on growth, capital and cycles (e.g. Michal Kalecki, 1939, 1971; Nicholas Kaldor, 1956; Joan Robinson, 1956, 1962; Luigi Pasinetti, 1974) had employed notions, such as class-based analysis, which were reminiscent of the categories employed in Classical Ricardian theory. Where the Neo-Ricardians went further was in calling for a wholesale Ricardian "microfoundations" enterprise for Keynesian macroeconomics. For suggestions and attempts along these lines, see Piero Garegnani (1978), John Eatwell (1979), Murray Milgate (1982) and Edward J. Nell (1998).