Iron Laws & The Foundation of Economics

When one asks who the founder of economics is, one would struggle not to say Adam Smith. Almost every book on the subject has at some point referenced or quoted Smith, he is as Galbraith would remark “the central tradition”.  I have recently taken some issue with seeing Smith as the central foundation of economics, especially as his work has become and has been the central part of conventional wisdom.

David Ricardo & Thomas Robert Malthus may have come after Smith but their significance is often disregarded, whether it is at schools teaching economics or some universities courses. This can firstly be attributed to the bleaker image of life that Ricardo and Malthus portray. Secondly, there seems to be a disparity between economic thinking and the way it is taught, as economic history is experiencing a renaissance of types in regards to its importance.

Ricardo often receives acclaim in his contribution to comparative advantage, trade, and protectionism.  However, he was an integral part in the development of our understanding of wages, developing the “Iron Law of Wages”. Malthus is most well-known for his dictation of the “Malthusian Catastrophe”, which ultimately defines the bounds of scarcity and ultimately poverty in relation to wages. As such one reason Smith may be a more popular source is due to his optimism, but in that he does not pay too much attention to the issues of inequality, distribution of capital, and the existence of poverty. Smith concentrates on the development of wealth and where the individual pursuit of wealth helps society as whole which are far more appealing ideas. Whereas Ricardo and Malthus both reached conclusions that were far from pleasant, to some extent a result of the society they lived in.

The Iron Law of Wages can be considered through the Malthus foundation where population growth occurs as a consequence of wages being above subsistence levels, and population decline occurs as a consequence of wages being below subsistence levels. As below subsistence levels the labourer cannot complete labour. This was concluded in his “catastrophe” where eventually population would surpass agricultural production, ultimately reducing all of society to subsistence levels. Now there are a variety of critiques to Malthus’s conclusion, especially now considering modern conditions as one can consider “surplus population” as a condition that is met where there is surplus wealth. Additionally, one can consider the development of science and technology which can lead to substantial increase in production with little or no change in population, so to some extent one can argue that Malthus’s reasoning is outdated.

Ricardo’s foundation for the Iron Law of Wages draws upon greater flexibility denoting natural prices and market prices. Where the natural price of labour is at subsistence level, but the market price could exceed this level indefinitely if there is a constant increase in capital. As he reasons that an increase in capital facilitates in a greater demand for labour. This is all accumulated in his Law of Rent which considers the return from land in regards to production, which then corresponds with wages. This ascertains that wages are not dependent upon the productivity of labour but in a sense marginal land where production is dependent upon the quality of land. This to some extent argues that the Iron Law of Wages fails to predict wages in the same manner that considering land does; it also disenfranchises the landowner from deciding land rents as it is wholly dependent upon the productivity of the land. Yet again this leaves one with the feeling of outdated concepts as we no longer have such a dependency on land as the central form of capital.

Even though the economics that Ricardo and Malthus respectively developed was applicable at their time it is less so now. But what is important to realise is the influence these concepts of wage, rent, and profit had and have on modern economics. Karl Marx had to some extent based his approach on Ricardian thought, examining the productivity of labour in regards to wages, but viewing labour as a unit of production rather than as a human source.  Thereby, Ricardo and Malthus had influenced one of the most dramatic economic deviations in recent history, on the basis of uniform productivity from a unit of labour exclusive to some degree of market forces. Even more so it allows a comparison of how wages are set now, and to what degree do workers get paid in regards to their marginal productivity or contribution, versus market created prices.

It is possible that we have spent far too much time including Smith in our teaching of economics, that we have not appreciated the contribution of other significant economists. The use of economic history can provide a strong foundation of economic thought and its development, as long as the study involves both orthodox and heterodox views. Let me take this opportunity to lament that Alfred Marshall should be far more involved in IB/A-Level textbooks than just the Marshall-Lerner condition, considering the importance of his Principles of Economics in 1890.

The question is shall I talk about Piero Sraffa next, or back off economic history for a while, and take it back to microeconomics and types of markets?


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s