Classical Economics / Classical Liberalism Defined — Thomas Malthus  — The Austrian Economists — John Maynard Keynes and Hayek Video — ThinkMarkets — The Independent Review of Thomas Sowell’s “On Classical Economics


Modern classical liberals trace their ideology to ancient Greece, the Roman republic and the Renaissance. They cite the 16th century School of Salamanca in Spain as a precursor, with its emphasis on human rights and popular sovereignty, its belief that morality need not be grounded in religion, and its moral defense of commerce. Other Renaissance thinkers such as Erasmus and Niccolò Machiavelli represent the rise of humanism in place of the religious tradition of the Middle Ages. Rationalist philosophers of the 17th Century, such as Thomas Hobbes and Baruch Spinoza developed further ideas that would become important to liberalism, such as the social contract. However, liberalism’s classic formulation came in The Age of Enlightenment. John Locke‘s Two Treatises of Government argued that legitimate authority depended on the consent of the governed, while Adam Smith‘s The Wealth of Nations rejected mercantilism, which advocated state interventionism in the economy and protectionism, and developed modern free-market economics. These early liberals saw mercantilism as enriching privileged elites at the expense of well being of the populace. Another early expression is the tradition of a Nordic school of liberalism set in motion by a Finnish parliamentarian Anders Chydenius.


Classical liberalism (also known as traditional liberalism[1], laissez-faire liberalism[2], and market liberalism[3] or, outside Canada and the United States, sometimes simply liberalism[4]) is a form of liberalism stressing individual freedom, free markets, and limited government.

This includes the importance of human rationality, individual property rights, natural rights, the protection of civil liberties, individual freedom from restraint, equality under the law, constitutional limitation of government, free markets, and a gold standard to facilitate global free trade and place fiscal constraints on government[5], as exemplified in the writings of John Locke, Adam Smith, David Hume, Thomas Jefferson, Voltaire, Frédéric Bastiat, Montesquieu and others. As such, it is the fusion of economic liberalism with political liberalism of the late 18th and 19th centuries.[2]

Thus, according to Razeen Sally the “normative core” of classical liberalism is the idea that a laissez-faire economic policy will bring about a spontaneous order or invisible hand that benefits the society,[6] though it does not necessarily oppose the state’s provision of some basic public goods with what constitutes public goods being seen as very limited.[7]

The qualification classical was applied retroactively to distinguish it from more recent, 20th-century conceptions of liberalism and its related movements, such as social liberalism.[8] Classical liberals are suspicious of all but the most minimal government[9] and object to the welfare state[10].

Ludwig von Mises, Friedrich Hayek, and Milton Friedman, are credited with influencing a revival of classical liberalism in the twentieth century after it fell out of favor beginning in the late nineteenth century and much of the twentieth century.[11][12] In relation to economic issues, this revival is sometimes referred to, mainly by its opponents, as “neoliberalism“.

  1. Brad Stetson, Human Dignity and Contemporary Liberalism (Westport, CT: Praeger/Greenwood, 1998), 26.
  2. Ian Adams, Political Ideology Today (Manchester: Manchester University Press, 2001), 20.
  3. Kirkpatrick, Jerry. Montessori, Dewey, and Capitalism. TLJ Books, 2008, p. 35
  4. Merriam-Webster gives a definition of “liberalism” as “a theory in economics emphasizing individual freedom from restraint and usually based on free competition, the self-regulating market, and the gold standard”
  5. McNeil, William C. Money and Economic Change. Columbia History of the Twentieth Century. Columbia University Press. 2000. p. 284
  6. Razeen Sally, Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History (London: Routledge, 1998), 17 (ISBN 0-415-16493-1). “Hence the normative core of classical liberalism is the approbation of economic freedom or laissez-faire—Adam Smith’s ‘obvious and simple system of natural liberty’—out of which spontaneously emerges a vast and intricate system of cooperation in exchanging goods and services and catering for a plenitude of wants.”
  7. Eric Aaron, What’s Right? (Dural, Australia: Rosenberg Publishing, 2003), 75.
  8. James L. Richardson, Contending Liberalisms in World Politics: Ideology and Power (Boulder, CO: Lynne Rienner Publishers, 2001), 52. “The term classical liberalism was applied in retrospect to distinguish earlier nineteenth-century liberalism from the new or modern liberalism, here termed social liberalism, of Green and Hobhouse. It is taken here to include the political economists’ laissez-faire within a broader political philosophy whose central value was securing of individual freedom against arbitrary state power.”
  9. Anthony Quinton, “Conservativism”, in A Companion to Contemporary Political Philosophy, ed. Robert E. Goodin and Philip Pettit (Oxford: Blackwell Publishing, 1995), 246.
  10. Alan Ryan, “Liberalism”, in A Companion to Contemporary Political Philosophy, ed. Robert E. Goodin and Philip Pettit (Oxford: Blackwell Publishing, 1995)
  11. Encyclopædia Britannica Online, s.v. “Liberalism” (by Harry K. Girvetz and Minogue Kenneth), p. 16 (accessed May 16, 2006). “With modern liberalism seemingly powerless to boost stagnating living standards in mature industrial economies, the more energetic response to the problem turned out to be a revival of classical liberalism. The intellectual foundations of this revival were primarily the work of the Austrian-born British economist Friedrich von Hayek and the American economist Milton Friedman.”
  12. David Conway, Classical Liberalism: The Unvanquished Ideal (New York: St. Martin’s), 8. “After falling into almost complete intellectual disrepute towards the end of the nineteenth century, classical liberalism was rescued from oblivion and revived in the twentieth century by such notable thinkers as Ludwig von Mises and Friedrich Hayek.”


In the United States, liberalism took a strong root because it had little opposition to its ideals, whereas in Europe liberalism was opposed by many reactionary interests. From the time of the industrial revolution through the Great Depression liberalism in America saw its first ideological challenges.[1] By the time of the Great Depression, liberalism in America had changed its definition to describe its former opposition, for example in the opinion of Arthur Schlesinger Jr.:

when the growing complexity of industrial conditions required increasing government intervention in order to assure more equal opportunities, the liberal tradition, faithful to the goal rather than to the dogma, altered its view of the state,” and “there emerged the conception of a social welfare state, in which the national government had the express obligation to maintain high levels of employment in the economy, to supervise standards of life and labor, to regulate the methods of business competition, and to establish comprehensive patterns of social security.[6]

In Europe, especially, except in the British Isles, liberalism had been fairly weak and unpopular relative to its opposition, like socialism, and therefore no change in meaning occurred.[1]

By the 1970s, however, lagging economic growth and increased levels of taxation and debt spurred a revival of a new classical liberalism. Friedrich von Hayek and Milton Friedman argued against government intervention in fiscal policy and their ideas were embraced by conservative political parties in the US and the United Kingdom beginning in the 1980s.[19] In fact, Ronald Reagan credited Bastiat, Ludwig von Mises, and Hayek as influences.[4]

At the heart of classical liberalism”, wrote Nancy L. Rosenblum and Robert C. Post, is a prescription: “Nurture voluntary associations. Limit the size, and more importantly, the scope of government. So long as the state provides a basic rule of law that steers people away from destructive or parasitic ways of life and in the direction of productive ways of life, society runs itself. If you want people to flourish, let them run their own lives.”[5]

  1. Eric Voegelin, Mary Algozin, and Keith Algozin, “Liberalism and Its History”, Review of Politics 36, no. 4 (1974): 504-20.
  2. Arthur Schelesinger Jr., “Liberalism in America: A Note for Europeans”, in The Politics of Hope (Boston: Riverside Press, 1962).
  3. Encyclopædia Britannica Online, s.v. “Liberalism” (by Harry K. Girvetz and Minogue Kenneth), p. 16 (accessed May 16, 2006).
  4. Ronald Reagan, “Insider Ronald Reagan: A Reason Interview”, Reason, July 1975.
  5. Nancy L. Rosenblum and Robert C. Post, Civil Society and Government (Princeton, NJ: Princeton University Press, 2001), 26 (ISBN 0-691-08802-0).
  6. David Conway, Classical Liberalism: The Unvanquished Ideal (New York: St. Martin’s), 8. “After falling into almost complete intellectual disrepute towards the end of the nineteenth century, classical liberalism was rescued from oblivion and revived in the twentieth century by such notable thinkers as Ludwig von Mises and Friedrich Hayek.”



The classical economists who followed in the footsteps of Adam Smith did not enjoy his widespread popularity. Dubbed the “prophets of gloom and doom,” they became associated with turning economic thought into a dismal science. Thomas Robert Malthus, in particular, became renown for his pessimistic predictions regarding the future of humanity. His major contribution to economic thought came in the essay “The Principles of Population.” Originally, Malthus wrote the piece in response to utopian utilitarians who suggested that population growth constituted an unmitigated blessing.

Essentially, Malthus predicted that the demand for food inevitably becomes much greater than the supply of it. This prediction is rooted in the idea that population increases geometrically while foodstuffs grow at an arithmetic rate. Curiously, Malthus offers no explanation as to how he determined these figures. (Encyclopedia of Economic Thought)

The projected population increase was expected to lead to a glut in the supply of labor and hence a fall in the price paid to that labor. At the same time, the growing demand for food and other provisions would surely raise the cost of survival. Malthus postulated that population growth would come to a standstill due to the increased price of supporting a family. The population then remains stagnant until the excess laborers convert enough forest into farmland such that “the means of subsistence become in the same proportion of the populations as at the period from which we set out.”

In other words, humanity goes back to square one and the process repeats itself. The entire affair becomes a vicious circle where improved conditions lead to an increase in numbers which in turn nullifies any improvements that have been made. As a result, the income of workers inevitably falls to subsistence level. In the long run Malthus expected that forces such as war, pestilence, famine and plague would operate as checks on a swelling population.


In forming his dark forecast Malthus failed to take several factors into consideration. The industrial revolution transformed the very nature of Western society, so that his principles, which assume that agriculture forms the center of the economy, lost their validity by mid-nineteenth century. Focusing exclusively on the birth rates of economically thriving communities, he failed to consider that part of his projected “population explosion” would come from a reduction in death rates.

This oversight throws Malthus’s theories into disarray. An increase in the elderly population would not have significant repercussions in the labor market. Essentially, wages would not fall to the extent that Malthus originally predicted. In an era where children entered the work force at an early age, an increase in birth rates would have more profound implications than a decrease in deaths.

A more forgivable mistake by Malthus involves his failure to anticipate the growth of technology. The advancements made in agricultural science allowed farmers to make greater use of their lands. The development of effective contraception also made “restraint” a non-issue in terms of checking population growth. Because of these scientific breakthroughs the theories of Malthus have had little relevance in regards to Western society.

Many underdeveloped nations, however, never adopted improved farming techniques or new methods of contraception. The results of this failure have mirrored Malthusian predictions to a startling degree. Overpopulation, famine, pestilence and war continue to ravage the third world. These events constitute an unhappy vindication of many of Malthusian doctrine.


Thomas Robert Malthus (13 February 1766 – 23 December 1834)

“In October 1838, that is, fifteen months after I had begun my systematic inquiry, I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The results of this would be the formation of a new species. Here, then I had at last got a theory by which to work”.

Charles Darwin, from his autobiography. (1876)

This often quoted passage reflects the significance Darwin affords Malthus in formulating his theory of Natural Selection. What “struck” Darwin in Essay on the Principle of Population (1798) was Malthus’s observation that in nature plants and animals produce far more offspring than can survive, and that Man too is capable of overproducing if left unchecked.

Malthus concluded that unless family size was regulated, man’s misery of famine would become globally epidemic and eventually consume Man. Malthus’ view that poverty and famine were natural outcomes of population growth and food supply was not popular among social reformers who believed that with proper social structures, all ills of man could be eradicated.

Although Malthus thought famine and poverty natural outcomes, the ultimate reason for those outcomes was divine institution. He believed that such natural outcomes were God’s way of preventing man from being lazy. Both Darwin and Wallace independantly arrived at similar theories of Natural Selection after reading Malthus.

Unlike Malthus, they framed his principle in purely natural terms both in outcome and in ultimate reason. By so doing, they extended Malthus’ logic further than Malthus himself could ever take it. They realized that producing more offspring than can survive establishes a competitive environment among siblings, and that the variation among siblings would produce some individuals with a slightly greater chance of survival.

Malthus was a political economist who was concerned about, what he saw as, the decline of living conditions in nineteenth century England. He blamed this decline on three elements: The overproduction of young; the inability of resources to keep up with the rising human population; and the irresponsibility of the lower classes.

To combat this, Malthus suggested the family size of the lower class ought to be regulated such that poor families do not produce more children than they can support. Does this sound familiar? China has implemented a policy of one child per family (though this applies to all families, not just those of the lower class).


The Austrian Economists

At Her Majesty The Queen’s Service

As anyone paying attention will know, the Queen raised a question to England’s best and brightest economists last fall — Why didn’t economists predict the financial crisis? The urgency of her question is in the context of the claim that this is the worst financial crisis the western world has faced since the 1930s. Late in July, a response came from Tim Besley and Peter Hennessy and sent on behalf of the British Academy. The response does not focus on the policy errors made, but instead on a failure of “collective imagination”. And that politicians and intellectuals of all stripers were “charmed by the market”. Besley and Hennessy argue that is it hard to imagine a better case of “wishful thinking combined with hubris.”

One can agree with this last statement, and still find the culprit not in the charm of the market, but the policies of the government. It was the idea not of perfect markets but of perfected monetary policy, fiscal policy and regulation that represents “wishful thinking combined with hubris.” And what produces such a “failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole” is, as Hayek argued of an earlier failure of collective imagination, the scientism that has a stranglehold on the policy sciences (including most importantly economics).

I received an email this morning from the British economist, Geoffrey Hodgson (and editor of the Journal of Institutional Economics) that discusses and provides an alternative letter put together by leading heterodox economists in the UK that puts the blame for the collective failure on the education of economists. Their position can be summed up as: “Mathematical technique should not dominate real-world substance.” The educational training of economists is too narrow. I am quite sympathetic to these criticisms, but then they go too far in my opinion when they indict “universal rationality” and “efficient market hypothesis” as the main culprits.

This just reinforces the idea that it was politicians being “charmed by the market” rather than alignment of scientism and statism that caused the crisis.

Besley and Hennessy letter

Hodgson et. al. letter


A blog of the NYU Colloquium on Market Institutions and Economic Processes

Neither Truth Nor Charity: The Destructive Influence of a Papal Encyclical

July 28, 2009

by Mario Rizzo

Recently Pope Benedict XVI issued a papal letter (“encyclical”) called “Caritas in Veritate” [CV] or “Charity in Truth” which is largely about economic issues relating to globalization. While there have been some commentaries on it, two prominent ones (here and here) in the Wall Street Journal do not reveal how truly bad it is. It may be that the pressures of journalism are such that people read such documents too quickly. I am being charitable.

An important exception is the excellent article by Terence Corcoran in the Financial Post (Canada). I recommend reading this.

I shall be making a series of posts on the encyclical. I wish to persuade the reader of a number of things. In this post, I wish simply to point out that the Church has, by its own admission and fundamental position, no special competence in scientific matters of economics. (See Sec. 9, CV.)  Its asserted competence is restricted to matters of faith and morals.

The linchpin of the encyclical, however, is that every economic transaction has moral implications. (See Sec. 37, CV.).  Thus the encyclical claims to be restricting itself to those.

Yet this is impossible. The reason is that economic actions and policies have consequences. These consequences are often indirect, long-run, and run through complex chains of causation. This is what the great nineteenth-century economist Frédéric Bastiat called the “unseen” in economic life.

If we grant, for the sake of argument, the Church’s special competence regarding moral principles, ends, or values, it is hard to see how, without scientific knowledge, it can make statements regarding the morality of economic actions or policies. Now it is true that if the Church’s position in morality were completely non-consequentialist, it could do this. (Recall the Roman statement: Morality though the heavens fall.)

But that is not the Church’s position in this encyclical. Pope Benedict is talking about consequences for income inequality, poverty, social stability, democratic forms of government, and so forth.

As I shall show in future posts, all sorts of “scientific” statements are being made – many of which have two (not necessarily overlapping) characteristics. First, they are not consistent with the overwhelming thrust of economic liberalism. Second, they reveal an ignorance of economic thought that often is at a very elementary level. Hence the policies that they support would be destructive to many of the ends the Church values.

In fact, the pope commits the “sin” against which he warns us: advocating charity without truth. This he says is simply sentimentality. (See Sec. 3, CV.)

All this is because the Church, in an effort to have a social-political-economic doctrine, has entered areas beyond its own admitted competence.


Supply created enough factor income to clear the market

  • Inventories will not accumulate.
  • A slow down to use excess inventory, which causes unemployment, was not necessary.

Savings is not a leakage because interest rates adjust to insure saving is borrowed and invested (spent).

  • Leakage describes the loss of a variable required to maintain a state of equilibrium (stable level of economic activity).
  • Interest rates drop when savings increase to insure savings is invested and there isn’t leakage.


During periods of slow economic activity wage rates would fall and everyone wanting to work could find work.

  • All factor prices, not just wages, would adjust downward and all factors would be fully employed.
  • “Real” factor prices would therefore remain constant.

Neither Truth Nor Charity, Part 2: Globalization and the Pope’s Discontents

August 3, 2009

by Mario Rizzo

Throughout Pope Benedict XVI’s enclyclical (“Caritas in Veritate”) he stresses that scientific knowledge is not enough when trying to determine appropriate government policies or even individual actions. This is quite true.

He fails, however, to appreciate in many specific instances and arguments the importance of the fact that that moral or ethical knowledge is also insufficient to determine appropriate government policy or individual actions. He pays lip service to this idea (Sec. 9, 30) but it rarely constrains him in practice, as we shall see.

Now consider a specific issue.

The pope is worried about the effect of globalization on the traditional welfare state. (Sec. 25) As countries compete for internationally-mobile capital resources (and to a much lesser extent, labor resources) they will feel the need to reduce taxes to encourage capital inflows (or prevent outflows). This may result in reductions in government spending on social welfare in both developed and developing countries. The pope doesn’t welcome this. He specifically recommends several constraints on the behavior of businesses to deal with this problem. But first let’s analyze the pope’s framing of the putative problem.

Benedict XVI has made a number of judgments: (1) It is morally obligatory for those who have abundance to help others who are poor; (2) The state – welfare state – is an appropriate institution to do this; (3) Such aid should not be left (largely/mainly/exclusively) to the voluntary decisions of other individuals or private agencies created for that purpose; (4) The free movement of capital and the greater prosperity it brings does not more than offset the value of welfare state handouts (an implicit assumption, given the pope’s positive recommendations – to be discussed in a future post).

1. Clearly he asserts competence with regard to point #1.  However, the extent of this beneficence and the sacrifice required by the benefactors are not determinate implications of his moral framework. (Or so it seems, given the practice of most Christians, including the pope.)

There is actually a scholarly discussion of this issue by, among others, Adam Smith. (See Lectures on Jurisprudence, Sec.1.14-1.16, and The Theory of Moral Sentiments, Sec. III: “Justice and Beneficence.”)

Smith appeals to the distinction between duties of perfect obligation and duties of imperfect obligation. Duties of perfect obligation are those for which the timing and extent of the obligation are determinate. For example, if I promise to deliver a thousand bushels of wheat in six months for a payment today of $X, this is what I must do.  Smith says “justice” in this narrow commutative sense is a duty of perfect obligation.

On the other hand, Smith grants that we have duties of beneficence. These are also called justice (“distributive justice”) by the pope (Sec. 35). But these obligations are different. They are imperfect duties. This means that their precise extent, their timing, and the person on whom the obligation falls in the particular case are not determinate implications of moral principles. Their precise implementation is left to the individual given all of the particular facts of the situation. Thus this particular form of “justice” is different from Smithian justice.

This is one reason Smith argues that duties of perfect obligation are suitable for legal enforcement while duties of imperfect obligation are not. To enforce the latter by law amounts to an arbitrary imposition.


The Independent Review
Volume 12 Number 2
Fall 2007
Title: On Classical Economics
Author: Thomas Sowell
Published: New Haven, Conn.: Yale University Press
Price: $23.10 (hardcover), $12.24 (softcover)
Pages: Pp. ix, 304.
Reviewer: James C. W. Ahiakpor
Affiliation: California State University, East Bay

Thomas Sowell’s On Classical Economics is about how little Sowell thinks of classical economics, not a critical restatement of classical economic principles to assist modern economic analysis or policymaking. Moreover, it is the dissenters from classical economic principles, in particular, Thomas Malthus, J. C. L. Sismondi and Karl Marx, whom Sowell credits with superior insights. Readers may be attracted by the facts that Sowell wrote two books on classical economics (1972 and 1974) and that he currently writes a weekly newspaper column on topical issues from a perspective many might think reflects classical economic principles.

But the book seriously disappoints. Half of the eight chapters are merely a reprint of Sowell’s Classical Economics Reconsidered (Princeton, N.J.: Princeton University Press, 1974), with no attention to the secondary literature since the late 1960s. He repeats claims that have been corrected since the early 1970s, especially on the classical theory of value and Say’s Law of markets…

…Sowell’s treatment of classical macroeconomics in chapter 2 is less in accord with the current interpretation of Say’s Law of markets and the classical quantity theory of money. He dwells on the wrong arguments by Thomas Chalmers, Sismondi, Malthus, and James Maitland, Earl of Lauderdale about the possibility of too much production of all goods, including money, in a country—all up against the clarifications of Smith, J.-B. Say, James Mill, Ricardo, and J. S. Mill. Sowell finds more accuracy in the dissenters’ views because he denies that proponents of the law used dynamic analysis and insists that the dissenters did so.

He also alludes to Say’s willingness to modify his original argument as being “subject to some restrictions” (p. 31), but he does not explain these restrictions, thus leaving the wrong impression that the law is not totally defensible. He gives no prominence to David Hume’s 1752 essay “Of Money” as the foundation of the classical quantity theory of money and the forced-saving doctrine, restated by the likes of Bentham, Henry Thornton, Ricardo, and J. S. Mill. His summaries, however, are a good counter to Keynesian views on these matters.

Sowell also gives a useful account of Smith’s and Ricardo’s views on government spending as a substitute for private spending, but one that may yet retard economic growth. However, he mars this summary by giving undue prominence to the erroneous counterclaims of Lord Lauderdale and William Blake, assigning them the insight of dynamics and denying the same to those whom they criticize. Strange that in chapter 2 Sowell finds no need to discuss the classical economists’ theory of interest, easily the most misunderstood of their principles in modern economics, except with a passing reference on page 37.

Chapter 3 is devoted to explaining classical microeconomics, including the theories of rent, profit, and value. Sowell well illustrates the Ricardian theory of rent but gives an undue emphasis to Ricardo’s quibbles with Smith on the inverse wage-profit relation in an economy experiencing diminishing returns in agriculture.

He also discusses Malthus’s population theory, mainly to register his own belief that Malthus’s arguments have no empirical support whatsoever. “Man’s food consists of plants and animals, which almost all reproduce in a shorter period of time and with more numerous offspring than man” (p. 57); thus, there is no threat of food scarcity as Malthus had warned. The counterclaims of Malthus’s critics, including Sismondi, Nassau Senior, and Richard Whately, are the basis for Sowell’s dismissal of modern references to starvation in some Third World countries as an affirmation of Malthus’s point.

Quite surprising in this chapter is Sowell’s failure to clarify Smith’s use of labor as a measure of value rather than as the determinant of exchange values (relative prices)—for Smith, the determinants are supply and demand in the short run and costs of production in the long run.

Sowell appears to be unaware of J. S. Mill’s clarification of that distinction in Smith’s and Malthus’s works: “To confound these two ideas [a measure of value and the determinant of value] would be much the same thing as to overlook the distinction between the thermometer and the fire” (Principles, book 3, chap. 15, p. 581). From his failure to recognize this point, Sowell is never able to absolve the classical authors, with the possible exception of Ricardo, from the false charge that they argued a labor theory of value.

He also fails to notice that Smith, Ricardo, and J. S. Mill based demand on utility, so he draws the wrong conclusions from their analysis. Besides the classical texts themselves—in particular book 3, chapters 1–6, in Mill’s Principles—Sowell could have benefited from some modern reaffirmations of the classical theory of value (for example, Samuel Hollander’s Classical Economics [New York: Blackwell, 1987]) and therefore refrained from arguing for a “marginalist [utility] revolution” (p. 152; see also pp. 78, 196–97) during the 1870s…

… Sowell believes that J. S. Mill has an overrated positive image in the literature and aims to correct that image in chapter 6, “The Enigma of John Stuart Mill.” He first sketches Mill’s personal life as one “woefully lacking in understanding or empathy with those around him, including members of his own family” (p. 129), illustrating that claim with Mill’s bizarre love life with Mrs. Harriet Taylor.

He repeats the charge that Mill snuffed out “the early beginnings of a utility theory of value and a schedule concept of demand” (p. 134) and chides Mill for failing to refer directly to Sismondi’s and Malthus’s statements on gluts or to “the leading socialist writer of all time—Karl Marx” (p. 137), thus violating Mill’s own precepts in Essays on Some Unsettled Questions (pp. 135–6). Sowell states that Mill was an elitist, contrary to his image as a defender of individual liberty owing to his essay “On Liberty.”

He also holds against Mill’s reputation the fact that Mill completed his Principles of Political Economy in barely eighteen months. Sowell does a good job of criticizing Mill’s efforts to separate the laws of production from those of distribution (pp. 147–49), but he is on shaky ground in denying George Stigler’s assessments of Mill’s contributions to price theory (pp. 150–51).

In chapter 7, “The Mysteries of Marxian Economics,” Sowell argues that because of Marx’s obtuse and scattered writing style, sometimes meant to set “traps” for readers (p. 182), “so many economists have misunderstood him” (p. 155), but he cites references from only the 1950s and 1960s in illustration of this argument. Hollander’s 1987 treatment of Marx’s scholarship is an easy counter to the claim.

Although Sowell repeats his attribution of the labor theory of value to the “classical economists” (p. 163), he credits Marx with criticism of the very labor theory without which Marx’s critique of capitalism would not stand: “While Marx followed Ricardo in seeing the value of a commodity as the labor time that went into its production, this was for Marx simply a definition, rather than a theory of prices” (p. 163, emphasis in original).

In illustrating the supposedly more enlightened Marxian view of price determination by supply and demand, Sowell (pp. 166–67) quotes, without criticism, an 1844 statement from Engels in which changes in supply and demand are confused with changes in quantities supplied and demanded.

Say’s Law explains the equation of supply and demand for goods, services, and capital in the marketplace, but Sowell credits Marx with a more enlightened version that focuses on individuals’ equations of their own supplies and demands (p. 174).

He quotes Marx’s allusions to changing relative prices and interest rates as possible sources of adjustment to equilibrium; although these very processes are described most clearly by Ricardo and J. S. Mill, Sowell credits Marx with the more useful insight that “beyond some magnitude of imbalance, this no longer worked” (p. 176). The crucial magnitude is not clarified.

Indeed, Sowell’s praises of Marx extend to his view that, contrary to what took place following revolutions inspired by Marx’s arguments, “he [Marx] saw the desirable features of a [‘post-revolutionary’] government as including universal suffrage and civil liberties—what people today loosely call democracy . . . [akin to] nineteenth-century laissez-faire liberal[ism]” (p. 192). Sowell does not deal with the incompatibility of Marx and Engels’s war on private property with the existence of civil liberties under democratic laissez-faire liberalism.

In the concluding chapter, “Thoughts on the History of Economics,” Sowell departs from the now generally accepted view that we study the history of economics so we may learn how and why theories developed or evolved, recognize the errors in those discarded, and draw insights for handling current problems in theory construction and policy formulation. Rather, he thinks that studying the history of economics is worthwhile only so that one may be considered “an educated individual” (p. 188).

He wonders if all the useful aspects of classical economics have not already been “incorporated into the latest textbooks, with the classical insights rendered into diagrams and equations, and the classical errors and misstatements decently buried without fanfare” (p. 188)—the “absolutist” view of theories’ development…

Sowell also downplays the role of economic events in prompting new theory construction, placing more weight on a discipline’s “own internal pressures to resolve the inevitable ambiguities and puzzles that arise in the course of groping for truth and clarity” (p. 196), a viewpoint drawn from Stigler.

The evolution of theories, particularly in macroeconomics, would indicate otherwise. Thus, Sowell wonders whether Keynes’s General Theory “would have been such an instant and runaway success had it arrived during the prosperity of the 1920s rather than during the Great Depression of the 1930s” (p. 201). But Keynes wrote that book specifically to address problems of a depression economy under the erroneous presumption that extant “classical” principles were inadequate.

In On Classical Economics, Sowell seeks to reflect “on a lifetime of research in the field [the history of economic thought] that first attracted [him] to economics” (p. viii), but the field has developed considerably since the early 1970s, even as the subject has been deemphasized in most universities’ economics curriculum. Sowell’s failure to keep up with the literature since the 1970s thus should caution prospective readers to verify his numerous references, in particular those that appear counter to their expectations.

For example, I would not interpret Smith’s arguments that “[i]n all great countries the greater part of the cultivated lands are employed in producing either food for men or food for cattle. The rent and profit of these regulate the rent and profit of all other cultivated land” (Wealth of Nations [New York: Modern Library 1937], p. 152) and “the rent of the cultivated land, of which the produce is human food, regulates the rent of the greater part of other cultivated land” (p. 159) by saying, as Sowell does, that “Adam Smith had long before [J. S. Mill] recognized that rent was a price-determining production cost when the land had alternative uses” (p. 151).

Ricardo is also well known for recommending tax, trade, and monetary policies for economic growth. It thus appears inconsistent to interpret his argument that “[i]t has been well said by M. Say that it is not the province of the Political Economist to advise:—he is to tell you how you may become rich, but he is not to advise you to prefer riches to indolence, or indolence to riches” (Works [Cambridge: Cambridge University Press, 1951], 2: 338), to mean “Ricardo disavowed any intention to advocate growth-promoting policies in general” (Sowell, p. 33).

I also would interpret Ricardo’s argument cited on page 69 as a leftward shift of the supply curve rather than as a rightward shift of the demand, as mentioned on page 70. Sowell also credits several writers with being the “first” to have said or done something (e.g., pp. 32, 45, 68, 100, 104, and 175). I would investigate these claims further before repeating them.

California State University, East Bay

Related Links


Vatican: Centesimus annus

ECON LIB: Keynesian Economics