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The Woes of Categorising

Economists as Optimists or Pessimists

Some classical economists who believe in a harmonious order of the society and envisioned a growth-based capitalism have been labelled as optimists.
Others theorised a conflict-ridden society in capitalism and have been termed as pessimists. This article discusses the validity of these labels.

Classical political economists of the 18th and 19th centuries have had different views of the society. Some economists have put forward the thesis of a harmonious society, promoting the policies of laissez-faire. The core belief behind this understanding is that if everybody pursues their self-interest, then the society would operate in a harmonious fashion (Kirzner 1989). Some others have focused on the conflicts between classes in the capitalist society, lending economics the name of a “dismal science” (Skousen 2007). While the former have been labelled as optimists, the latter have been commonly called pessimists (Schumpeter 1954; Hicks 1966; Popescu 2007). The optimists are enthusiastic about the growth prospects of capitalism, while the pessimists are critical about the same (Alvey 2003; Schumpeter 1954).

This article attempts to argue that such a dichotomy is erroneous and that it is an incomplete understanding to limit these thinkers to definite categories. The article will examine this by restricting the discussion to the works of Adam Smith, David Ricardo, Jean-Baptiste Say, and Karl Marx. To begin with, the article tries to understand these labels, defining the “optimism” and “pessimism” as understood commonly. We shall discuss whether the nomenclature does justice to the work of these economists.

Self-interest and Harmony

Adam Smith: Smith was a classical economist who focused on long-run economic growth with his analysis centred around a self-interest maximising individual. Smith’s (1776) An Inquiry into the Nature and Causes of the Wealth of Nations was concerned with increasing the overall national income of a country. This was to be brought about by the division of labour that would stimulate capital accumulation, increase productivity of the workers, and increase national output, and consequently, the wealth of nations would be augmented.

One of Smith’s popular concepts is the “invisible hand,” which he borrowed from Bernard de Mandeville (1714). The implication is that the self-interested actions of every individual would culminate in public welfare and the competitive forces in the economy would constantly work to harmonise society as a whole (Viner 1927). In The Theory of Moral Sentiments, Smith (1759) states that by spending their surplus wealth, rich people unknowingly contribute to making a distribution of the “necessaries of life” equally among the people of the society. Similarly, in The Wealth of Nations, he asserts that when individuals pursue their own advantages, it collectively leads to public benefit.

Smith has often been touted as the prophet of capitalism. He wrote that the history of human beings has passed through four major epochs: the age of hunters, the age of shepherds, the age of agriculture, and the age of commerce; and this history has culminated into the age of commerce where freedom, civilisation and self-preservation, and consequently happiness, reached its highest form (Alvey 2003). He has, therefore, been labelled as “the great optimist” (Skousen 2007: 37) on account of his enthusiasm towards the prospects of economic growth in the commercial age, and his belief in the rationality of the individual, which will drive towards the general betterment of the society (Viner 1927; Bishop 1995). Through free trade, division of labour and capital formation, Smith further envisaged the progress of a nation under the domain of the unrestricted spread of the market economy through laissez-faire (Skousen 2007).

Jean-Baptiste Say: Say is often considered the French successor of Smith with respect to his optimism and promotion of laissez-faire and free trade. In fact, Skousen (2007: 50) writes,

Adam Smith’s optimistic vision was never in more capable hands than those of the French devotees of laissez-faire. Short of the marginal analysis, they carried the doctrine of the invisible hand and the natural harmony of the market system to its zenith.

Influenced by Smith’s work, Say was associated with the doctrine of laissez-faire. Say built on Smith’s writings, focusing on the centrality of self-interest, and extending the idea of an invisible hand that guides social interests (Forget 2001). He was enthusiastic about the role of the entrepreneur, one who is responsible for the creation of new products and services using the right combination of resources (Forget 2001). In his work, A Treatise on Political Economy (1836)Say talks about how trade protectionism hurts consumers in all countries and actively propagates free trade.

Say introduced a pro-production model of economic growth, where production is the source of demand. Since, in general, demand is equal to the production of goods, overproduction could not occur. Hence, the production of a good creates its potential demand. This implies that during times of depression, it was prescribed to wait for the market to take its course as it would rectify the imbalances in the long run (Formaini 2006). Thus, Say put prime importance on self-interest and its corrective mechanism, asserting that social processes and institutions adhere to some “natural” law independent of the foresight of administrators (Forget 2001).

Belief in Natural Order

The analysis of the likes of Smith and Say has been associated with the theory of harmony. This theory favours laissez-faire policies with minimum intervention of the state and institutions, such that the interests of every individual in the society are at harmony with each other (Kirzner 1989). One interpretation of the theory of harmony is of a society where there are no conflicts among the various agents and everybody’s interests can be met jointly (Mises 1949). An associated interpretation is the idea of a “spontaneous order,” which implies that markets generally mend themselves in an orderly fashion as a result of the self-interest maximising behaviour of various agents, and that this behaviour is also responsible for the unplanned and progressive evolution of social institutions over centuries (Forget 2001). In fact, Bishop (1995: 169) states that scholars in business ethics and economists like Milton Friedman and Allan Gibbard endorse “amorality in the executive suit” since the invisible hand would take care of justice and morality, and thereby justifies the profit-seeking behaviour of firms, where pursuing one’s self-interest would necessarily lead to the overall welfare of the society.

Say is most famous for what is known as the Say’s law, the simplest understanding of which states that the “supply creates its own demand.” This law fundamentally came as a criticism of the physiocratic doctrine and has been used by classical economists (Roncaglia 2017). The central thesis of Say’s law was to restate Smith’s theory insofar as technological development can improve production and living standards of population, and growth is driven by savings and investment rather than consumption (Roncaglia 2017). Moving to the interpretation of the Say’s law, we see that it has often been misunderstood, most notably by Keynes (Beraud and Numa 2019). He inferred that Say claimed that supply creates its own demand, and alleged that Say was stating the economy would always be in full employment.

Pessimists: An Impending Doom?

David Ricardo: Ricardo was influenced by Thomas Malthus (1798) who posited that the population would outgrow natural resources and the society would ultimately reach a situation of “misery and vice.” Ricardo (1815) formalised the model by incorporating the assumption of diminishing marginal returns and asserted that a stationary state, where the profit rate falls to zero, was inevitable in the economy. At the stationary state, larger class of the population would survive only on subsistence and would put pressure on the limited resources, while small proportion of landowners would extract the profit. Thus, the sustainability of economic growth was a prime concern for both Malthus and Ricardo (Ucak 2015).

Ricardo also directed attention to class conflict, asserting that the interest of the landowners is “always opposed to the interest of every other class in the community” (Ricardo 1815: 7). Through his “iron law of wages,” he stated that the wages of the worker will fall down to the subsistence wage in the long run. Additionally, economic progress, while consistently driving down profits, would simultaneously raise land rents. Ricardo also states how the substitution of workers by machines would displace workers and cause unemployment and intensify class conflicts (Kurz 2010). This brings to the fore a class conflict between the landlords and the capitalists. Class conflict, instead of harmony, was a central feature of Ricardo’s economic analysis (Mitra 1977).

Joseph Schumpeter (1954) alleged that economists like Malthus and Ricardo lacked imagination because their primary focus was on the struggles and problems of the people despite living through the progress of the industrial revolution. Ricardo was pessimistic about the long-run economic trend and was accused of underestimating technical progress (Roncaglia 2017). Ricardo has been classified as a technological pessimist, with a strong focus on diminishing returns in agriculture (Kurz 2010). However, this perceived pessimism of Ricardo, Malthus and John Stuart Mill appeared to take the optimistic laissez-faire world into “desperate straits” (Skousen 2007).

Karl Marx: The reasons behind labelling Ricardo as a pessimist are intensified with Marx. Marx borrowed from Ricardo and took those ideas forward. He theorised an antagonistic view of the society where there is a conflict of interests between the two major classes—the capitalists and the proletariat. Marx (1867) highlighted the exploitative nature of capitalism through alienation of labour, and extraction of surplus value of the workers. The introduction of machinery in capitalism displaces labour, and creates a reserve army of labour in the form of excess population, which pushes wages downwards (Kurz 2010).

In his dialectic view, there is a continuous contradiction between dynamic forces of production and the historical social relations of production, and between the economic base and the social structure. He stated that the profit rate in capitalism will tend to fall with the progress of capitalism. These contradictions culminate in class conflicts, which would ultimately lead to the demise of capitalism (Marx 2007). Capitalism that was perceived to be “mutually beneficial” and “naturally harmonious” by Smith and Say is now theorised to be “alien, exploitative and self-destructive” (Skousen 2007: 65).

By revealing the exploitative nature of Smith’s age of commerce, and the prediction that the system would be responsible for its own demise, Marx has been labelled a pessimist by some commentators (Skousen 2007; Ucak 2015).

Justified Labels?

As mentioned earlier, the metric of laissez-faire and enthusiasm is used to define the limits of using the term “optimism,” which finds resonance in its more common usage. This has led to this categorisation as optimists and pessimists. However, does such labelling do justice to the work of these thinkers?

‘Pessimism’ of the ‘Optimists’

 

Adam Smith: Smith is associated with the theory of harmony, one interpretation of which entails the absence of conflict across the interests of individuals (Kirzner 1989). However, Smith had himself discussed the issues of conflict and power structure within the economy (Samuels 1977). He had mentioned that when the land of a country becomes private property, the class of landlords will try to extract rent off the land through the labour of the workers. Further, in the chapter, “Of the Wages of Labour” in The Wealth of Nations, Smith identified the contradiction between the workers and the employers in the manufacturing sector. He placed these contradictions on the difference in interest of the two classes. While the employers are interested in lowering the wages, the workers’ interests lie in increasing the same. In this conflict, the employers and workers do not have the same bargaining power because of the legislative power and higher savings that the former possess (Viner 1927). As a result, the employers’ interests generally prevail. Smith, therefore, had introduced not only class contradictions, but also the topic of class antagonism in his economic analysis (Mitra 1977).

A detailed reading of Smith would reveal that he was doubtful about the long-run benefits of technological progress. Although the productivity of workers would increase, they are not expected to benefit from this, as the stock of capital would accumulate in a few hands. In fact, a situation might arise where “rent and profit eat up wages and the two superior orders of people oppress the inferior one” (Smith 1776: 438). The conflict among classes observed here goes against the common perception that Smith believed self-interested individuals to bring about societal harmony.

Similarly, although Smith was favourable towards the policies of laissez-faire, it would be incorrect to invoke Smith to argue for minimum government intervention. Smith had stated that the government should help in the removal of barriers to choose occupations, undertake public activities in education, hygiene, progressive taxations, protect private property and regulate the currency (Letiche 1960). The government also had to be responsible for reducing the harmful effects of economic progress and introducing laws to secure justice and security (Forget 2001). Therefore, opening up markets would not necessarily entail the potential for progress. There is a need to mitigate the conflicts of interest in the society in which the government plays a crucial role. So, here again, we find that Smith’s optimism in market mechanisms to maintain social harmony is restricted to a considerable extent.

The often-cited instance of the “invisible hand” also comes along with its cautions from Smith himself. He had stated that if the market is left to itself, greed of some people may hamper any sort of development, and private property owners would end up accumulating a lot of wealth (Viner 1927). His prescription of a division of labour might lead to damage the intelligence and creativity of the workers. In fact, he was critical of the persuasion of self-interest of merchants as that would not lead to any public well-being but rather may lead to oppression and deception of the public (Bishop 1995). Thus, the claim that one can pursue self-interest and solely depend on the sense of justice and equality of the invisible hand appears to be flawed from Smith’s own point of view.

As mentioned before, Smith’s optimism stems from the advent of the advanced age of commerce. However, where Smith predicts the inevitability of the age of commerce in human history, he also provides a caveat that the terrain and climate prevents the advent of the age of commerce in some parts of the world (Alvey 2003). Further, the persistence of slavery in the modern commercial age points at its failure to ensure a harmonious natural order (Alvey 2003).

Jean-Baptiste Say: We have briefly discussed how Say was misinterpreted by Keynes. Say’s postulates do not imply that supply is necessarily equal to demand and that the economy is always in full equilibrium (Formaini 2006; Beraud and Numa 2018). His primary focus was on production and not on supply. Despite the conventional understanding of Say’s law stating “supply creates its own demand,” he only meant that selling products would increase an individual’s personal money holding, which could potentially, but not necessarily, enable the buying of other goods (Beraud and Numa 2018). Thus, the universality of supply creating demand according to Say does not necessarily always hold.

Moreover, although Say has often been clubbed among the economists who favour the natural order of things with minimum interference of the government, he recognised the role of the legislature for the smooth functioning of the economy (Forget 2001). Say identified that there may be conflicts in interests among the various classes in the economy. He assigned the role to the legislator to take care of the consumption of the different classes, providing education and public goods, and address the problems of workers during the course of technological improvement (Forget 2001). Public benefit would not occur naturally until the intervention of a capable legislator.

Thus, the postulates of Smith and Say are not universally optimistic. Both have expressed their doubts regarding the unhindered and therefore “natural” order of the economy and have put sufficient stress on the functions of the government. The few pursuing their self-interest might very well lead to the oppression of the majority, thereby causing conflicts among the different classes in the society instead of ensuring harmony among them. Thus, the basis of looking at these economists as optimists is therefore flawed and incomplete.

‘Optimism’ of the ‘Pessimists’

Hollander (1977) addresses how Schumpeter’s charge of pessimism against Ricardo is misleading and unfounded. Ricardo stressed on how efficient organisation can promote the growth of the British economy (Letiche 1960). Hollander (1977) furnishes evidence that documents Ricardo’s speeches in the British parliament, and correspondences about his views about the future growth prospects in Britain. Letiche (1960) states that labelling Ricardo as a pessimist is irrelevant; he should instead be labelled as “over-optimistic” about the long-term growth prospects of Britain. In fact, Ricardo was enthusiastic about the technological progress in both agriculture and manufacturing (Hollander 1977). The diminishing returns that Ricardo’s “pessimism” focused on would be overcome by technological progress (Rostow 1990). Although Ricardo did predict a downward trend in profit rate, he did not attach much weight to this, as his theoretical growth model predicted “dynamism of the British economy” (Hollander 1977).

In the third edition of On the Principles of Political Economy (1821), there is no longer the mention of the barrier to profit that comes up in Ricardo’s original argument: if technological progress is furthered by continuous accumulation, then the barriers to capitalist growth can diminish (Davis 1993). Introduction of machinery can, in fact, increase rents, which should make him an optimist spokesperson for capitalism (Davis 1993). Technological innovations in forms of introduction of machinery and international trade can get rid of the negative effects of a stationary state (Ucak 2015).

Marx was undoubtedly critical about capitalism and its effects on the society. However, he did note how the advent of capitalism, according to him, would do away with feudal and patriarchal structures and get rid of any pre-capitalist divisions of labour (Marx and Engels 1848). The progress of capitalism, according to him, would destroy the sexual division of labour within the family, and the women would no longer be financially dependent on the men of the family (Hartmann 1979). When more and more women would join the labour force, they would eventually be emancipated from the patriarchal constraint (Engels 1884). Marx has also noted the huge increase in productivity that capitalism would bring about with itself. Marx and Engels (1848) state how capitalism has massively increased productive forces by controlling all the nature’s forces. Marx has noted how capitalism has utilised science in order to systematically increase productivity of the society, and the introduction of machine-based manufacturing has impro­ved productivity among people more than ever before (Rosenberg 1974). Because of its own motives of profit accumulation, capitalism introduces newer technical innovations, and abandons older techniques (Okishio 1977). Marx acknowledged the immensely growing British industry and attributed it to the convergence of a unique system of incentives, availability of scientific knowledge, and special technology (Rosenberg 1974). Capitalism is indeed perceived to be a system that was detrimental to the working class, but Marx acknowledged how the advent of capitalism would be a necessary precondition for breaking up the pre-capitalist social hierarchy, and the immense productive capacity that it brough along with it.

Conclusions

From the discussions above, it can be understood that labelling the economists as optimists and pessimists is incomplete and incorrect. Smith and Say, the suggested optimists, were not unconditional prophets of natural order of the economy and harmonious order of society. They also talk about conflicts among groups of people, when people follow their self-interests without any government intervention.

Similarly, the so-called pessimists too had prospects that they were enthusiastic about. Ricardo was optimistic about the advent of capitalism on account of the technological progress that it would bring about. Marx was enthusiastic about the technological benefits of capitalism.

One probable reason for the continued misunderstanding of these thinkers is that these interpretations are largely influenced by the power and ideology prevailing in the discipline (Samuels 1977). It is a political convenience to pigeonhole these economists in linear boxes and invoke Smith every time someone needs to defend the wrath of the free market and is useful in defending the conventional paradigm of economist today. However, it is imperative to undertake a detailed reading of these thinkers, to prevent the perpetuation of orthodox dogmas in the name of these thinkers.

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Updated On : 5th Jun, 2022
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