The making of the classical theory of economic growth

This collection is tied together with a rigorous introduction and a new chapter on capital accumulation and will be of interest to postgraduates and researchers focusing on the History o

The Making of the Classical

Theory of Economic Growth

One of the defining features of the modern world is the way we take economic growth for granted We worry, of course, but we worry about a slow down in growth, or about falling behind in the race to grow It was not always so Before the late eighteenth century, economic growth in its modern sense, that is, contin-uing growth in income and output over indefinitely long periods of time, was simply not on the intellectual map The ‘classical’ theory of economic growth,

magisterially set out in Adam Smith’s Wealth of Nations in 1776, marked an

epochal change in the way we think about economic life and, indeed, about human society

This collection of Professor Anthony Brewer’s essays focuses on the critical developments in thinking that put the study of economic growth on the agenda

It includes essays on David Hume and on Smith’s debt to him, on A R J Turgot’s achievement and on his relation to Smith, on various controversial aspects of Smith’s theory, and on Edward West’s neglected contribution to developing the theory further in the generation after Smith It was Smith’s contemporary, Adam Ferguson, who hinted at a role for technical change (‘invention’) as a source of growth and it was John Rae, two generations afterwards, who was the first to present a coherent account in which invention plays the primary role This aspect

of the story is covered by essays on Ferguson, on Rae’s critique of Smith, and on his treatment of invention

This collection is tied together with a rigorous introduction and a new chapter

on capital accumulation and will be of interest to postgraduates and researchers focusing on the History of Economic Thought and Economic Growth

Professor Anthony Brewer taught economics at the University of Bristol from

1967 onwards, with spells as an academic visitor at Duke University, Chuo University, and elsewhere He is now retired, but still active in the subject, with the title of Emeritus Professor of the History of Economics He has been Secretary and Vice-President of the European Society for the History of Economic Thought

Routledge Studies in the History of Economics

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Distribution and value from William

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Tony Aspromourgos

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Luigi Pasinetti and Alesandro

Roncaglia

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Albert Jolink

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Michel Verdon

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From the beginnings to 1945

Robert W Dimand and

Mary Ann Dimand

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Sandra Peart

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Ajit K Dasgupta

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12 Austrian Economics in Debate

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Teodoro Dario Togati

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Sixty years after the ‘General Theory’

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The leisure class and sovereignty

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24 Evolution of Austrian Economics

From Menger to Lachmann

Sandye Gloria

25 Marx’s Concept of Money

The god of commodities

Anitra Nelson

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27 The Development of Economics in

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28 The Canon in the History of

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Critical essays

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29 Money and Growth

Selected papers of Allyn Abbott Young

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31 The Foundations of Laissez-Faire

The economics of Pierre

Essays in honour of R D C Black

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34 Towards an Unknown Marx

A commentary on the manuscripts

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Enrique Dussel

35 Economics and Interdisciplinary Exchange

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36 Economics as the Art of Thought

40 The German Historical School

The historical and ethical approach

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41 Refl ections on the Classical

Richard Arena and Cecile Dangel

44 On the Development of Long-run

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Tom Kompas

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Economic analysis and values

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50 The Spread of Political Economy and the Professionalisation of Economists

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Massimo Augello and Marco Guidi

51 Historians of Economics and Economic Thought

The construction of disciplinary memory

Steven G Medema and Warren J Samuels

52 Competing Economic Theories

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53 Economic Thought and Policy in Less Developed Europe

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58 Classics and Moderns in Economics,

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Essays on nineteenth and twentieth

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62 The Historical School of Economics

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Tamotsu Nishizawa

63 Classical Economics and

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Studies in long-period analysis

Heinz D Kurz and Neri Salvadori

64 A Bibliography of Female Economic

67 Essays in the History of Economics

Warren J Samuels, Willie Henderson,

Kirk D Johnson and

Marianne Johnson

68 History and Political Economy

Essays in honour of P D Groenewegen

Edited by Tony Aspromourgos and John Lodewijks

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Lars Magnusson

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73 Knut Wicksell on Poverty

No place is too exalted

Richard van den Berg

77 Money and Exchange

Folktales and reality

Sasan Fayazmanesh

78 Economic Development and

Social Change

Historical roots and modern

perspectives

George Stathakis and Gianni Vaggi

79 Ethical Codes and Income

Distribution

A study of John Bates Clark and

Thorstein Veblen

Guglielmo Forges Davanzati

80 Evaluating Adam Smith

Creating the wealth of nations

82 New Voices on Adam Smith

Edited by Leonidas Montes

and Eric Schliesser

83 Making Chicago Price Theory

Milton Friedman–George Stigler

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Edited by J Daniel Hammond and

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84 William Stanley Jevons and the

Cutting Edge of Economics

Bert Mosselmans

85 A History of Econometrics in France

From nature to models

87 Considerations on the Fundamental

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Vilfredo Pareto (Edited by Roberto

Marchionatti and Fiorenzo Mornati)

88 The Years of High Econometrics

A short history of the generation that reinvented economics

90 Interpreting Classical Economics

Studies in long-period analysis

Heinz D Kurz and Neri Salvadori

91 Keynes’s Vision

Why the Great Depression did not return

John Philip Jones

92 Monetary Theory in Retrospect

The selected essays of Filippo Cesarano

Filippo Cesarano

93 Keynes’s Theoretical Development

From the Tract to the General Theory

Toshiaki Hirai

94 Leading Contemporary Economists

Economics at the cutting edge

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95 The Science of Wealth

Adam Smith and the framing of political economy

98 Frank Knight and the Chicago

School in American Economics

Ross B Emmett

99 A History of Economic Theory

Essays in honour of Takashi Negishi

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100 Open Economics

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104 A History of Entrepreneurship

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105 Keynes on Monetary Policy,

Finance and Uncertainty

Liquidity preference theory and the

global fi nancial crisis

Jorg Bibow

106 Kalecki’s Principle of Increasing Risk and Keynesian Economics

Tracy Mott

107 Economic Theory and Economic Thought

Essays in honour of Ian Steedman

John Vint, J Stanley Metcalfe, Heinz D Kurz, Neri Salvadori and Paul Samuelson

108 Political Economy, Public Policy and Monetary Economics

Ludwig von Mises and the Austrian Tradition

Gilles Jacoud

111 Studies in Social Economics

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112 The Making of the Classical Theory of Economic Growth

Anthony Brewer

The Making of the Classical Theory of Economic Growth

Anthony Brewer

First published 2010

by Routledge

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All rights reserved No part of this book may be reprinted or

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Library of Congress Cataloging in Publication Data

Brewer, Anthony, 1942–

The making of the classical theory of economic growth / by Anthony Brewer

p cm

Includes bibliographical references and index

1 Classical school of economics–History 2 Economics–History

3 Endogenous growth (Economics) 4 Economic development

This edition published in the Taylor & Francis e-Library, 2010.

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collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.

ISBN 0-203-85184-6 Master e-book ISBN

In memory of Alan West Brewer (1915–2007)

The Scottish tradition from Hume to Smith 37

3 An eighteenth-century view of economic development:

4 Luxury and economic development: David Hume

5 Adam Ferguson, Adam Smith, and the concept of

PART III

6 Turgot: founder of classical economics 97

7 Turgot, Smith, and capital accumulation 111

xiv Contents

PART IV

8 Adam Smith on classes and saving 129

9 Rent and profit in the Wealth of Nations 144

10 Edward West and the classical theory of distribution

PART V

11 Economic growth and technical change: John Rae’s

Acknowledgements

I would like to express my thanks to the publishers and editors of the journals and books listed below for permission to reproduce previously published materials

Chapter 2 The Concept of Growth in Eighteenth-Century Economics, History of Political Economy , 27, 1995, pp 609–38

Chapter 3 An Eighteenth-Century View of Economic Development: Hume

and Steuart, European Journal of the History of Economic Thought, 4, 1997,

pp 1–22

Chapter 4 Luxury and Economic Development: David Hume and Adam Smith,

Scottish Journal of Political Economy , 45, 1998, pp 78–98

Chapter 5 Adam Ferguson, Adam Smith, and the Concept of Economic Growth,

History of Political Economy , 31, 1999, pp 237–54

Chapter 6 Turgot, Founder of Classical Economics, Economica , 54, 1987,

pp 417–28

Chapter 8 Adam Smith on Classes and Saving, in From Classical Economics to the Theory of the Firm: Essays in Honour of D P O’Brien , ed R Backhouse and

J Creedy, Cheltenham: Edward Elgar, 1999, pp 120–38

Chapter 9 Rent and Profit in the Wealth of Nations, Scottish Journal of Political Economy , 42, 1995, pp 183–200

Chapter 10 Edward West and the Classical Theory of Distribution and Growth,

Economica , 55, 1988, pp 505–16

Chapter 11 Economic Growth and Technical Change: John Rae’s Critique of

Adam Smith, History of Political Economy , 23, 1991, pp 1–12

Chapter 12 Invention, in The Economics of John Rae , ed O Hamouda, C Lee

and D Mair, Routledge, 1998, pp 129–43

Note on the text

With the exception of chapters 1 and 7, these essays have been published before They are reprinted here as nearly as possible without change, since it is confusing

to have different versions of the same material in the public domain For that reason, each chapter has its own set of notes at the end of the chapter and its own set of references The text (including bibliography and notes) is reproduced as it was originally published, so some chapters use North American conventions (double quote marks, and the like) while others follow UK conventions Reference may be made to different editions of original works in different chapters The result may sometimes be annoying, for which I apologise, but it is a conse-quence of the original decision not to revise the essays I have, however, corrected

a very few simple typographic errors, and where there are references to papers which are included in this collection I have added the cross-reference to the chapter concerned

Part I

The invention of economic growth

1 Introduction

The ‘classical’ theory of economic growth, magisterially set out in Adam Smith’s

Wealth of Nations in 1776, marked an epochal change in the way we think about

economic life and, indeed, about human society Before the late eighteenth century, economic growth in its modern sense, that is, continuing growth in income and output over indefinitely long periods of time, was simply not up for discussion Earlier writers, of course, worried about ways of improving economic performance, of increasing wealth and improving living standards, or of increas-ing the share of the nation or of the city in international trade None of this is the same as the theory of continuing growth over the indefinite future found in Smith Pre-classical writers did not consider economic growth in this sense and reject it They did not consider it at all It was not on the agenda

Smith’s book changed all that After the Wealth of Nations , growth rapidly

came to be taken for granted, so much so that it is difficult for modern readers to recognize its absence from earlier writings Modern economists, of course, do not talk about growth all the time They frequently focus on the sort of questions that were under discussion before Smith But growth is always in the background, so well recognized that it is often unnecessary to mention it Before Smith it wasn’t mentioned, but because it had not occurred to anyone to consider it Smith was not the first to write about economics He was not the father of economics, as has sometimes been said, but he was, with Turgot (see below) the father of growth economics

The essays collected here are an attempt to contribute to the understanding of this crucially important turning point in economic thinking They were written over a period of time, but as part of a sustained effort to understand classical and pre-classical economic thinking on growth They are not a random collection – they hang together to make up a consistent view – but they were written, and in most cases originally published, separately Each essay, therefore, was written to stand on its own and to deal with a particular aspect of the story, leading to a small, but unavoidable, element of repetition between essays, for which I apolo-gize Each essay focuses on a topic on which I thought there was something to be said that was sufficiently substantial and original to justify publication Well-known topics, where I saw no need to challenge the conventional wisdom, are passed over, or mentioned only in passing This introduction, therefore, aims to

4 The invention of economic growth

provide a brief overview, linking together the essays and filling in the gaps The previously published essays themselves are reproduced as they appeared origi-nally, without any revision, because it would be confusing to have two versions

of the same paper in the public domain 1

The classical theory of growth

For present purposes, the classical theory of economic growth 2 has three essential features: (a) capital accumulation is seen as the primary source of economic growth, (b) population growth is treated as endogenous, and (c) invention or, in modern terms, technical change, is treated as secondary or relatively ignored Each of these three deserves some discussion

(a) The role of capital accumulation is central Unpicking it, the argument goes like this (i) People, on average, save There are ‘prodigals’ who dissipate their wealth, but they are not typical Spending by the state (especially on wars) is a greater danger, and there are catastrophes which destroy capital, but net saving is normal in ‘almost all nations, in all tolerably quiet and peaceable times’ (Smith

1976 : 343) (ii) What is saved is invested, either by the saver or by someone to whom they have lent the money Hence, capital accumulation is normal (iii) The incentive to save (and invest) is the profit return on investment The idea of profit

as a regular form of income alongside wages and rent was new in the late eenth century Earlier writers thought about profit as a form of wages or as an irregular gain made by merchants who buy cheap and sell dear In the classical picture, capital investment is needed to employ workers and to provide them with materials Owners of capital (or ‘stock’) seek out profits, so capital is mobile between different industries, with investment flowing to areas where profit is high and tending to equalize profits (allowing for risk) across the system Saving, therefore, is directed by profit signals to where it is needed, and outputs of differ-ent goods match the demand for them (iv) Accumulation of capital makes growth of output and employment possible and, since the economic system works

eight-to its full capacity, at least in normal times, accumulation ensures that growth actually takes place

(b) Population was assumed to be endogenous If capital accumulation makes

it possible to employ more people, then population will (given time) expand in line with the demand for labour The mechanism is ‘Malthusian’ (though it goes back well before Malthus) Population change is assumed to be a function of income levels At ‘subsistence’ level, incomes are just enough to maintain the population from generation to generation, but no more This is effectively a defi-nition of ‘subsistence’ At lower levels of income, either people avoid having children that they cannot afford to support, or mortality rates increase, because of hunger and susceptibility to disease, to an extent which outweighs new births When incomes rise above subsistence, the population starts to grow In a static system with a constant capital stock, wages would settle at subsistence level, since higher (lower) wages would lead to an expanding (contracting) population and labour force and hence to more (less) competition for jobs, driving wages

Introduction 5

down (up) towards the subsistence level In a growing system, the accumulation

of capital allows growing employment, the growing demand for labour bids wages up, and in the long enough term, population grows in line with the demand for labour This view fits with the classical view of capital and accumulation The focus in classical economics is on working capital, required to pay the wage bill and to pay for materials in advance of the sale of the product Capital accumula-tion is important primarily because it allows increased employment, not because

of substitution of capital for labour or an increase in the capital–labour ratio, though some of the later classical writers did consider some degree of substitution

In the main story, capital accumulation leads to parallel, though not necessarily proportional, increases in both capital and labour

(c) Technical change (‘invention’) is not wholly ignored in classical ics, but it plays a secondary role Smith, for example, cited the invention of

econom-‘machines which facilitate and abridge labour’ (1976: 17) as one of the quences of the division of labour, which in turn requires capital accumulation Invention thus falls into place in an account of growth driven by saving and accu-mulation 3 Before Smith, Adam Ferguson emphasized invention, though not,

conse-I would argue, to the extent of basing a story of growth on it (see chapter 5) Later

on, John Rae criticized Smith’s theory and reversed the causal order In Rae’s story, invention is the primary cause of growth, while saving and investment, though necessary, are passively induced by the profit opportunities created by invention (see chapters 11 and 12)

In the classical view, then, given a reasonable level of peace and security, the economy will grow over time as a result of the private, self-interested actions of individuals who seek only to better their own condition (Smith 1976 : 341) No special external stimulus or policy change is needed, and no change in motivation

or habits It is an essentially quantitative conception of growth, driven by the growing quantity of accumulated capital Any structural changes are the result, not the cause, of growth

Before Turgot and Smith

The idea of continuing growth on the lines summarized above is not found before Turgot and Smith That case is argued in detail in chapter 2, so I will not duplicate the argument here That chapter, however, focuses on the specific question of the presence or absence of a concept of continuing growth, neglecting other ways

in which earlier writers helped to set the scene for the emergence of the developed classical theory

Richard Cantillon’s Essay on the Nature of Commerce in General was,

argu-ably, the first attempt to understand the economy as an integrated system, held together by market exchanges (For a fuller treatment of Cantillon, see Brewer ( 1992 ).) Turgot and Smith took much from him In particular, his concept of intrinsic value (equilibrium price) is essentially the same as Smith’s natural price

In Cantillon’s account, if production of some particular good, agricultural or manufactured, exceeds (falls short of) demand, the price and hence the returns to

6 The invention of economic growth

that line of production will fall (rise), inducing a shift of production away from products in excess supply and towards those in short supply Output thus adapts

to demand, and returns are equalized (Cantillon 2001 : 30) Cantillon’s version differs from Smith’s in that the return to capital plays no role in Cantillon – in the developed Smithian version, the focus is on the flow of capital between sectors, leading to equality in the profit rate (adjusted for risk and the like), but the effect, the adjustment of output to demand, is the same Cantillon recognized that indi-viduals need capital to be able to set up in business, and that they have to get

an appropriate return on their investment (Prendergast 1991 ), but there is no sign that he saw the availability of capital as a constraint on the overall level of activity In his account, the amount and fertility of the land is the ultimate constraint The basis of the economy is an essentially unchanging agricultural sector Manufacturing is not tied to the land in the same way, and a country can expand manufacturing output and employment if it is successful in export markets, importing food and other agricultural products to match This, however,

is a zero-sum game, with one country gaining at the expense of others, and is not

at all like the continuing endogenous growth which Smith described

François Quesnay took the next step forward, basing himself on Cantillon but emphasizing the need for capital as a key constraint in agriculture, which he regarded as the only productive sector I argue in chapter 2 that he did not develop that insight into a theory of continuing growth He was very pessimistic, probably unduly so, about the state of French agriculture and the French economy gener-ally, arguing that output and population had fallen drastically over the preceding century or so He blamed taxation which fell directly on farmers, together with restrictions on prices and on trade in grain, which held down agricultural returns

In his account, improved policies could bring about a fairly rapid and potentially large recovery, so his focus was on the short to medium term, not on long-term continuing growth

The emphasis on investment as the key to growth was substantially new and represents a very important step towards Smith’s economics Apart from the exclusive emphasis on agriculture, the other major difference between Quesnay and Smith from the present point of view is his treatment of profit and saving

In the numerical examples which carry the main thrust of Quesnay’s argument,

an improvement of policy leads to an increase in farmers’ revenue They are then assumed to invest the whole of this gain, leading to very striking economic expansion (in the numerical examples), but when leases come up for renewal the whole gain, including the profit (net revenue) derived from the new investment,

is captured by the landlord in increased rent, bringing the expansion to a halt since the landowner is not assumed to invest out of the increased rent Whether this is really the whole of Quesnay’s case is discussed more fully in chapter 2 The point here is to note how different this is from Smith’s (and Turgot’s) treat-ment, in which individuals, from many (unspecified) ranks in society, save as a matter of routine out of their normal incomes

David Hume, by contrast, certainly recognized the fact of economic ment in Britain in particular and Europe in general His account of economic

develop-Introduction 7

development is dealt with at length in chapter 3, while chapter 4 discusses the connections between his ideas and those of Adam Smith He is also discussed in chapter 2 It is enough to say here that he presented an account of the transition from a simple, and poor, agricultural society to a fully commercial system, a transition which involved a large increase in output in agriculture as well as in

other sectors His multi-volume History of England dealt mainly with political

and military events but also, in passing, applied his view of development to the history of England from the Romans to his own times Hume’s story is based

on changes in the set of goods available and changes in motivation, with quences for economic institutions, for example the replacement of feudalism with

conse-a constitutionconse-al monconse-archy It is thus quite different from whconse-at I conse-am cconse-alling the classical theory of growth, which deals with quantitative expansion in an already developed commercial system There is, however, no conflict between the two: Smith took over Hume’s story to account for the historical emergence of commercial societies and added his own theory to account for continuing growth

James Steuart substantially followed Hume’s account of economic development, though with a less optimistic slant He is discussed in chapter 3 Another Scot, Adam Ferguson, deserves mention His economic arguments are less substantial than his contribution to other social sciences, but he did emphasize the potential for technical change in a way that was unusual at the time He is discussed in chapter 5

In sum, Cantillon and Quesnay, both based in France, made important butions to the emerging analytical framework of classical economics but neither had a theory of continuing growth In Scotland, by contrast, Hume, Steuart, and Ferguson had, in different ways, ideas about economic growth, or development, (they did not use those words, of course) but did not start to construct a coherent theory of continuing growth That was done by Turgot and, to much greater effect, Smith

Turgot and Smith

The classical theory of economic growth, as I have defined it, was first set out

by Anne Robert Jacques Turgot in his Réflections sur la Formation et la Distribution des Richesses of 1766, ten years before the Wealth of Nations In

some respects one might argue that he went beyond Smith and anticipated

Ricardo On the other hand, few read the Réflections at the time (or later) and

Turgot did not place any great emphasis on the growth theory implicit in his arguments Turgot deserves to be recognized as the first in the field, but it was Smith who reshaped the way we all think Chapter 6 deals with Turgot’s analysis

Turgot and Smith met in early 1766, shortly before Turgot wrote the Réflections and at a time when Smith was starting work on what became the Wealth of Nations , so it is natural to ask whether one influenced the other, a question

discussed in chapter 7

It goes without saying that the Wealth of Nations is one of the most important

landmarks in the history of economics, and also that economic growth is a central

8 The invention of economic growth

theme of the book Turgot had the core theory, but well hidden in a work which few read Smith developed the argument at length in an immensely influential work Subsequent thinking on growth was shaped almost exclusively by Smith’s version of the theory

The main line of argument of the Wealth of Nations is identical to the ‘classical

theory’ summarized in the first section of this introduction Saving is normal and savers invest, so capital accumulation is normal, given market institutions and a reasonable level of security Population growth is endogenous, so accumu-lation leads to a progressively growing level of population, employment and output It is true that Smith stressed the gains from the division of labour in a way that few before or since have done, but this does not alter the basic outline

of the theory since he also stressed that investment is a necessary precondition

of an extended division of labour, so it is still saving, converted into investment, that drives the growth of output Capital accumulation leads to growth in employ-ment (matched, in the long run, by increased population through the endogenous population mechanism), and the increasing scale of activity leads to gains

in output per head, through a greater division of labour In Smith’s words:

‘The quantity of industry, therefore, not only increases in every country with the increase of the stock which employs it, but, in consequence of that increase, the same quantity of industry produces a much greater quantity of work’ ( 1976 : 277) 4

Chapters 2, 4, and 5 in this book deal with the relation between Smith’s theory and those of his various predecessors; chapters 8 and 9 deal with particular

aspects of the Wealth of Nations

As I have already stressed, saving plays an essential role in Smith’s theory of growth It is often said that he thought that landlords squander their income while capitalists (profit earners) are the main savers Chapter 8 shows that there is little

or no basis for this oversimplified claim Smith’s emphasis was on the motives and situations of individuals

Smith’s account of wages, based on the endogeneity of population, was ally accepted by his successors for something like a century It is not accepted now because it depends on an assumption that higher wages will always lead

gener-to population growth at a rate high enough gener-to prevent wages from rising above

a certain level In practice, in relatively developed countries, growth of output ultimately outstripped growth in population, so that it made sense to think of capital accumulation as (mainly) a cause of increased capital per head rather than thinking of it as (mainly) a cause of matching population growth as the classical writers did Smith certainly thought that growth had raised wages well above subsistence, in Britain at least, but he still thought of accumulation primarily as a

source of growth in both capital and labour rather than as a source of growth in capital relative to labour

Smith’s treatment of profits and rent, by contrast, was seen as less than factory by his successors It is often said or implied that Ricardo simply filled a gap in Smith’s analysis Chapter 9 argues that matters are not so simple Smith’s

satis-account was not in a simple sense weaker than Ricardo’s but it was different in

Introduction 9

that it stressed the multiple alternative uses of land, which Ricardo did not, and

in dealing with an open economy where Ricardo’s main results are based on a simplified closed economy

After Smith

The Wealth of Nations came out in 1776, and Smith died in 1790 The population

of Britain was rising, the Napoleonic wars disrupted imports of food, and there was a run of very bad harvests Corn (food grains such as wheat and barley) became very scarce and expensive, only for prices to collapse again when condi-tions returned to normal To pick some illustrative years, the price of wheat was

40 (shillings per quarter) in 1776, rose to 148 in 1800, and then fell to 69 in 1815,

at the end of the war Rents on agricultural land naturally shot up in the years of high prices, but the increased rents became unsustainable when prices fell again Food supplies and prices became a central political issue in 1815 with a proposed revision to what were called the ‘Corn Laws’, laws restricting imports of corn and thus tending to keep prices high

Smith’s account of rent, profit and agricultural growth was not very helpful, and his discussion of bounties (subsidies) on corn exports, 5 in which he claimed that an increase in the price of corn would be matched by a proportionate increase

in all other prices ( 1976 : 509–10), was unconvincing

A number of writers responded by developing a new theory of rent, commonly referred to as the Ricardian theory, though Ricardo was not the first to publish it The key idea was of an agricultural margin In the simplest case, if land is either used to grow corn or not used at all (a case Smith did not consider), the best land will be used first, and there will be a margin at which land is just worth cultivat-ing Land which is worse than the marginal land will not be used at all The marginal land commands a zero rent, while landlords capture as rent all returns

on better land over and above the return at the margin Farmers’ profits are given

by the return on marginal land minus wage costs As the economy grows, so does population and thus demand for food, forcing cultivation to worse land, or to more intensive cultivation of better land The profit rate falls until the economy ultimately reaches a stationary state with the profit rate reduced to the minimum rate at which it is worth investing This is a familiar story, which is not worth pursuing in further detail

Chapter 6 argues that Turgot anticipated this theory, if not entirely explicitly,

in 1766 In the early nineteenth century, it was rediscovered by Thomas Robert Malthus, Edward West, Robert Torrens, and David Ricardo Chapter 10 discusses West’s rather neglected version

Ricardo was in fact the last of the writers listed to publish the rent theory that his name is commonly attached to, though only by a few weeks – the four 1815 publications by the writers listed above were effectively simultaneous

He went on to embed the new theory in a general treatise, his Principles

of Political Economy and Taxation , which ensured that it was his form of the

story that survived Despite his undoubted importance there is no essay in this

10 The invention of economic growth

collection specifically devoted to Ricardo, because I do not have anything sufficiently novel to say about him As far as the topic under discussion here

is concerned, the textbook accounts of Ricardo seem to me to be essentially correct

The important point here is that Ricardo accepted the basic Smithian account

of growth without dispute Saving leads to capital accumulation, and population growth follows Capital and labour inputs thus grow, with labour supply adapting itself (given enough time) to the rate of growth of the demand for labour The available land cannot, of course, grow, imposing an ultimate limit on growth Smith recognized that well enough, but his analysis of the resulting falling rate of profit and of the ‘full complement of riches’ (the stationary state) was informal and unconvincing Ricardo derived much stronger results by considering simple cases with strong assumptions

Ricardo’s wage theory has been much disputed In the basic presentation of his theory he used an implicitly static demand for labour together with an endog-enous population to argue for a fixed subsistence wage in the long run (The subsistence wage is defined here as the wage which will keep the population and hence the supply of labour constant, so the result is almost tautological given the assumptions – very much Ricardo’s style) In other places, however, he supported Adam Smith’s story in which a growing economy has wages above subsistence (e.g Ricardo 1951 : 94–5) The traditional reading of Ricardo, still supported by many scholars, is based on the subsistence wage theory What has been called the

‘new view’ of Ricardo has high profits and positive capital accumulation in an economy with plentiful land, leading to above subsistence wages As the econ-omy grows, on this reading, both wages and profits fall until the stationary state

is reached, with wages reduced to subsistence and profit to a minimum level at which accumulation ceases (Hicks and Hollander 1977 ) A third possibility is to recognize that Ricardo was inconsistent and deny that there is a single ‘Ricardian’ wage theory (c.f Peach 1993 : 130–31)

Chapter 10 points out that West, as well as presenting the theory of rent side Malthus, Torrens, and Ricardo, had a clear insight into the simultaneous determination of wages, profits, and growth on the lines which Hicks and Hollander hypothesized in their ‘new view’ of Ricardo West should be given the credit for presenting it before Ricardo, and doing so far more clearly

The final two essays in this collection are separated out as an epilogue, because they do not relate to the making of the classical theory of growth but to the first

signs of progress beyond it Chapter 11 deals with John Rae’s New Principles of

1834, an important but neglected work, which argued that long-term growth was the result of technical change (in Rae’s terms, ‘invention’) and that saving and accumulation without invention would soon come to an end Technical change

as a source of growth had been considered before (by Adam Ferguson among others – see chapter 5) but Rae was the first to develop the argument in some detail and use it to criticize Adam Smith explicitly Chapter 11 builds on the one before by examining Rae’s discussion of the sources of and incentives for invention, and the policy conclusions he drew from it 6

Introduction 11

Notes

1 Chapter 7, which is published here for the fi rst time was written, circulated, and presented

at a conference at much the same time as the other chapters, and is reproduced here without substantial amendment

2 A note on terminology: the classical economists, the school of writers from Adam Smith in the late eighteenth century to John Stuart Mill in the mid nineteenth, did not,

of course, call themselves or their theories ‘classical’ – that is a modern label, fi rst used

by Marx The classics did not use the phrase ‘economic growth’ either, but a variety of other circumlocutions Smith, for example, used a number of different phrases, such as

‘the progress of opulence’ Since these essays are written for modern readers, it is often appropriate to use modern terminology

3 Note, incidentally that the word ‘machine’, as used by Smith, was used in the eighteenth century to mean almost any kind of implement, however simple

4 Note that ‘industry’ here means effort, or labour input, ‘work’ means output, or useful results

5 In Smith’s time, Britain was on average an exporter of corn, while by 1815 it was corn imports that were under discussion

6 Chapter 11 is entitled simply ‘Invention’, as if it was a general treatment of the subject, but in fact deals almost exclusively with Rae This is because it was originally published

in a volume devoted wholly to Rae

References

Brewer , A ( 1992 ) Richard Cantillon: Pioneer of Economic Theory , London : Routledge Cantillon , R ( 2001 [ 1755 ]) Essay on the Nature of Commerce in General , New Brunswick

and London : Transaction Publishers

Hicks , J R and Hollander , S ( 1977 ) ‘Mr Ricardo and the moderns’ , Quarterly Journal of

Economics , 91 : 351 – 69

Peach , T ( 1993 ) Interpreting Ricardo , Cambridge : Cambridge University Press

Prendergast , R ( 1991 ) ‘Cantillon and the emergence of the theory of profit’ , History of

Political Economy , 23 : 41930

Ricardo , D ( 1951 [ 1817 ]) On the Principles of Political Economy and Taxation ,

Cambridge : Cambridge University Press

Smith , A ( 1976 [ 1776 ]) An Inquiry into the Nature and Causes of the Wealth of Nations ,

ed R Campbell , A Skinner , and W Todd , Oxford : Oxford University Press

Turgot , A R J ( 1977 [ 1766 ]) Réflections sur la Formation et la Distribution des

Richesses , in P Groenewegen (ed.), The Economics of A R J Turgot , The Hague :

Martinus Nijhoff , 43 – 95

2 The concept of growth in

is not easy to tell whether they thought of the stationary state as a real future possibility or a mere analytical device

The purpose of this article is to ask when and how this view emerged I shall argue that Adam Smith’s view of continuing growth as the normal state of affairs was anticipated only by Turgot and (with very substantial qualifications) by David Hume The classics thought that growth was normal because they assumed (a) that saving is normal, once income is above subsistence, (b) that the capital market is sufficiently effective to allocate saving to whatever investment oppor-tunities exist, and (c) that investment (capital accumulation) is the key to growth

By contrast, few earlier writers thought of investment as a major determinant of output, and most thought that surplus 1 accrued mainly to landlords, who were unlikely to save They frequently sought ways of improving economic conditions, but they did not think in terms of continuing growth Hume fits neither of these simplified descriptions He was aware that there had been almost continuous growth in Britain (at least), but he seems not to have thought of growth as normal

or inevitable in quite the way Smith did, and his account of economic ment was very different from Smith’s James Steuart followed Hume’s account

develop-of development, but added elements develop-of a more static character based on work by Richard Cantillon and others As far as growth is concerned, he added little or nothing to Hume Turgot, on the other hand, anticipated all the main elements of Smith’s analysis of growth, albeit in less detail He is often counted as a Physiocrat but, in this as in so much else, he was the first of the classics 2 The classics did not generally use the word “growth” (Smith used a variety of formulae, such as the “progress of opulence”, the “continual increase of national wealth”, and so on), and the word is still used in a variety of senses today By

“growth” I mean a continuous increase in total output over indefinitely long ods of time, as opposed to once-for-all bursts of expansion in response to changed conditions Note that it is growth in total output, not per-capita output, that is

peri-The concept of growth 13

under discussion Growth in total output may be accompanied by changes in the composition of output (because of changes in the relative prices of agricultural and nonagricultural goods or differing income elasticities of demand), and it may

or may not be accompanied by increases in per-capita output Smith, of course, described the productivity gains that follow an increasing division of labour, but many classical writers, from Turgot on, also stressed diminishing returns in agri-culture, leaving the overall change in per-capita output indeterminate 3 Note also

that the determinants of the rate of growth will be of secondary concern – it is

first necessary to discover whether growth (in the sense defined above) was on the agenda at all

I shall first discuss eighteenth-century views of population and population growth, and the general character of economic thought in the first half of the eighteenth century I shall then deal with five major authors who wrote in the third quarter of the century (François Quesnay, David Hume, James Steuart, Anne Robert Jacques Turgot, and Adam Smith), in roughly chronological order For expositional convenience, I take Quesnay before Hume (Quesnay was the older, but his main economic writings date from a few years after Hume’s), and Steuart before Turgot (they wrote at almost exactly the same time) All five were active in the 1760s

This view was held by most, but not all, early writers on economics Among those discussed here, Hume and Quesnay are partial exceptions Hume had an eclectic theory of population Quesnay was rather vague on the subject, though

he used an (alleged) fall in population as evidence of economic decline, and repeatedly claimed that only economic success could lead to sustainable popula-tion growth However, he frequently treated population as fixed – he said, for example, that industry should not be allowed to attract workers away from agri-culture, implying a fixed total supply of labour (Meek 1963 , 74), perhaps because

he usually worked in a short(ish) term framework Among earlier writers, William Petty 5 (with some of his immediate successors, such as Gregory King) treated the rate of population growth as essentially fixed (indeed, he tried to show that his estimate of the rate of population growth was consistent with a conven-tional dating of Noah’s ark) He did not describe any other source of continued growth, so he expected the economy to grow at a constant rate of about one-third

of a percent a year, in line with population This is, it must be admitted, a model

14 The invention of economic growth

of sustained growth, but it differs from classical models in almost every other respect Petty treated population growth as exogenous and largely ignored capi-tal; the classics saw capital accumulation as the driving force behind economic growth, and treated population growth as a consequence, not a cause, of growth

In Petty’s story, economic growth is a mere reflection of demographic change

It would be tempting to think of information about population as factual data that eighteenth-century writers could have used to test different theories, but it would be misleading to do so The available information was so limited and so sketchy that it could be used to support almost any account of economic growth

or decline 6 The estimates of population growth made by John Graunt, Petty, and others were based on the difference between estimated birth and death rates, a small difference between much larger numbers, measured with considerable error Steuart was able to argue that the excess of births over deaths detected by Petty and others was counterbalanced by unmeasured deaths and by emigration, thus proving to his own satisfaction that population was approximately constant

In any case, these estimates measured, at best, the rate of change of population at

a particular moment, not the long-run trend Data over long periods of time were simply not available The debate over population change that took place in Britain in the 1750s was quite inconclusive (Glass 1973 )

Despite the lack of reliable evidence, many French writers thought that the population of their country had declined 7 Quesnay, for example, thought that the population of France had fallen from about 24 million to about 16 million in the preceding century, and thus that the French economy had contracted massively (for example, INED 1958 , 506–7, 510, 512–16) Little wonder that he, and others, did not think of growth as the normal case Modern historical demography casts a very different light on the history of population in the early modern period European population was generally expanding during the centuries before 1750, albeit slowly, though there was something of a pause (not a substantial decline)

in the early eighteenth century In France, population may hardly have increased over a period of centuries (this is controversial), but it did not decrease signifi-cantly except in major epidemics

On a larger time scale, eighteenth-century thinkers often looked back to sical antiquity as a golden age Cantillon, for example, thought that the popula-tion of Italy had fallen from 26 million in classical times to 6 million at the time

clas-he was writing ([ 1755 ] 1964, 83) 8 In the very long run, then, history was a story

of decline followed by recovery, not of continuing growth Hume was one of the few to challenge this view ( 1955 , 108–86)

Economic thought before 1750

There was an active literature on economic issues from the mid-seventeenth century on Since most writers put forward policy proposals that they thought would lead to an improvement in economic conditions, and since it is all too easy

to take some proposal designed to increase output or income and to present it as

“a theory of economic growth”, it is worth repeating that a once-for-all increase

The concept of growth 15

in output as a result of a change in policy does not count as growth in the sense

employed here In the classical view, growth was continuous and automatic That view, I claim, did not appear in any developed form before the second half of the eighteenth century

In the mercantilist tradition, the point of economic policy was to increase the wealth and power of one nation (relative to others) by gaining a greater share of

an (essentially fixed) world market 9 Even in this tradition, one can find some notion of growth Thomas Mun, for example, argued that nations, like individual traders, could reinvest the profits of trade, “multiply their Mony, … grow rich, and when they please turn all their estates into Treasure” (Mun [ 1664 ] 1986, 16)

It is, however, clear that an expansion of (external) trade is not the same as an endogenous increase in domestic output, and that growth of external trade in an otherwise static world is an essentially limited process

Josiah Child ([1693] n.d.) perhaps came closer to anticipating the classical view of growth than anyone else discussed in this section 10 He was an advocate

of relatively free trade, but he saw the world in essentially mercantilist terms, in that his story centers on the expansion of trade by gaining markets from foreign competitors At the same time, he recognized that there had been very consider-able growth in Britain in the preceding half-century (the country had grown

“richer”), and he described the growth process in terms very reminiscent of Turgot and Smith Low interest rates, he said, encourage the improvement of land, encourage people to use their own funds productively and to live frugally, allow merchants and manufacturers to undercut competitors from high-interest countries, and so on (one could find matching quotations from Smith on almost all these points) Population increases, because prosperity encourages marriage and immigration, and discourages emigration, while agricultural improvement feeds the enlarged population However, he insisted that low interest rates were the cause, not the effect, of prosperity, and that the secret was to reduce interest rates by law He admitted that this was the weakest part of his argument and that interest rates were low in Holland without overt legal restriction, and he qualified his argument by saying that the reduction in permitted interest was “natural”, but

he had no other proposal to make and no explanation of falling rates other than legal regulation In particular, he did not see saving as a cause of an abun-dance of investible funds, and hence of low interest, as the classics did In his story, then, growth was the result of specific policy measures rather than being endogenous and normal, as in Turgot and Smith

A major theme of the French literature, from Pierre de Boisguilbert to Quesnay, was the scope for increased agricultural output Boisguilbert, writing at the turn

of the century, argued that output in France had declined catastrophically since about 1660, and that agriculture and commerce in France had never before been

in such bad condition (INED 1966 , 587) The power of France had been halved

(INED 1966 , 582) He blamed the tax system The main direct tax, the taille , fell

arbitrarily on poor farmers, who were least able to bear it and were ruined Their product was lost, and they no longer provided a market for the products of others, who were brought down too Once some had been bankrupted, the tax burden

16 The invention of economic growth

shifted to others who were ruined in their turn, leading to cumulative decline

Indirect taxes, the aides and douanes , impeded trade and often made produce

effectively unmarketable The solution was straightforward – a simplified, universal, and predictable tax system would allow an immediate recovery It would take, he said in 1695, only twenty-four hours for a hundred thousand new traders (and new taxpayers) to spring up, if his proposals were adopted (INED

1966 , 662) In a later version, it would take but two hours for the government to decide, and fifteen days to carry the reforms through Boisguilbert is an excellent example of a writer who saw the possibility of an immediate once-for-all improve-ment in output and population (if his proposals were followed), without having any visible notion of continuing endogenous growth

Sébastien Vauban argued a very similar case He claimed that agricultural output had fallen by a third over the previous generation or so ([ 1707 ] 1933 , 27)

and that his proposal for a form of income tax (a dîme or tithe) in place of

arbitrary exactions on farmers would restore the value of land and bring back prosperity (108) Producers feared that any extra output would be confiscated by tax gatherers, while demand was low because of the generally poor state of the economy (28–29, 38) Population had fallen, but if the country were better peopled the land could be better cultivated (169)

John Law, too, saw excess capacity everywhere, but he argued that economic performance was below potential because of a lack of money, which could be remedied by creating paper money His arguments are sometimes read in terms

of a lack of demand, but this is difficult to square with the fact that he explicitly argued that increased export sales would not help, as goods would only be diverted from the home market – “we have not any great quantity of goods, more than what is consumed or exported” (1934, 62) – and that increasing the money supply would improve the trade balance by increasing output more than home demand (for example, 1934 , 144) It seems that he thought an increase in the money supply would act as an increase in working capital (see Brewer 1992a , 146–56 for fuller discussion) His follower (and ex-employee) C DuTot advanced similar arguments 11 He argued in great detail that the revenues of the King of France had fallen in real terms throughout the two preceding centuries (1935, 1:140) Since 1715, or 1719, France had done better, thanks to Law’s system (for example, 1935, 2:11, 12) England had grown, first because it enjoyed an influx of precious metals and then because of an increasing volume of credit (for example,

2:90, again drawing on Law) He actually spoke of growth ( accroissement ; 1:239),

but in the context of the “reanimation” of commerce that had been “enfeebled” by lack of demand and lack of confidence There is no visible notion of continuing growth in either DuTot or Law

Cantillon’s Essai sur la Nature du Commerce en Général (published in 1755 ,

but written about 1730) 12 was another reaction to the collapse of Law’s system, written by another associate of Law In Cantillon’s system, the only scarce resource, land, is in fixed supply, so the (world) system as a whole cannot grow

He knew that individuals need capital to start production but he did not treat capital as scarce in the aggregate, while population was endogenous In an open

The concept of growth 17

economy, the size of the manufacturing sector depends on competitiveness Imports of food and raw materials, paid for by exports of manufactures, allow population to expand beyond the autarchy level Conversely, net imports of manufactures imply a smaller manufacturing sector and a smaller total population than in autarchy Thus there can be some growth of output and population by manufacturing for export and importing food, but only at the expense of other countries Cantillon saw this growth as temporary High levels of skill and expe-rience allow a successful country to retain a competitive edge for a considerable length of time, but low-cost competitors eventually enter, build up their experi-ence and reputation, and finally displace the previously dominant centers Cantillon’s examples suggest that he thought the period of prosperity could last for many decades, but not forever

Yet another of Law’s old associates, J F Melon, took a different line again

“According to the progress of the arts, men first worked the land with their hands, and then with instruments, which at first gave only limited assistance, but which experience progressively increased This progress of industry has no limits; it is

to be presumed that it will always grow and that new wants will always appear for a new industry to supply” (1734: 109) Taken out of context, this looks like a candidate for a notion of continuing growth (at last) In the context of the rest of Melon’s book, however, it looks less significant The cited extract is in a chapter titled “industry”, meaning “effort” or “work”, so “new industry” in the extract means

“new opportunities of employment” As far as one can see, Melon meant little more than that novelties are always coming along, and that a nation must keep up

if it is to succeed in international competition He continued by listing a number

of relatively new products (like tobacco and silk) and remarked that it is a great advantage to control the production and trade of such goods (110) His main concern was to ensure employment, and to avoid crime and civil discord Within

a few pages he was suggesting that idleness should be made a “state or capital crime” (121)

His discussion of luxury is very similar He remarked that what seemed luxury

to our ancestors has become common and that what now seemed luxurious would not seem so to our descendants (130–31), 13 again suggesting a vision of continu-ing growth He went on to justify luxury as a source of employment – if there were some who were not needed to produce necessities, or in manufacturing, or

in the army, they were better employed providing luxuries than left idle 14 He diluted the impact of this by adding that only about a thousand persons, in a population of twenty million, lived lives of real luxury, so even if luxury produced effeminacy (as some had argued), it could do little harm (134) He did, however, admit that a train of valets and the like would be a hindrance to an army on active service (135)

In short, Melon’s Essai Politique sur le Commerce contains a jumble of

unre-lated arguments There are just two paragraphs (in a medium length book) that hint at a notion of continuing growth, without developing it He did, it is true, depart from the generally pessimistic tone of the French literature, but his argu-ments do not look particularly surprising or novel against the background of the

18 The invention of economic growth

English literature from Child to Tucker It is possible that Hume noted, and built

on, those two paragraphs (which he would certainly have agreed with), but he could equally have found similar ideas in works by, say, Bernard Mandeville 15 Luxury as a source of employment was much discussed in the age of Versailles

Finally, Montesquieu’s L’Esprit des Lois deserves a brief mention It has been

described as “the most important French work for the history of economic thought between Boisguilbert and Quesnay” (Hutchison 1988 , 220), but although Montesquieu’s comparative approach influenced many, including Hume and Steuart, he said little directly about economic growth He recognized that “Europe has reached such a high degree of power that nothing in history is comparable to it”, but he also argued that European population had declined since the early middle ages ([1748] 1989, 392, 452) Where he did recognize economic development,

he attributed it to a series of fortuitous historical developments (387–90), such as the discovery of sea routes to the Americas and to the East (itself attributed to the invention of the compass) and to changing theological views

Quesnay

François Quesnay (1694–1774) based the framework of his economic theory on Cantillon, 16 but its substance was derived from his own studies of the poor state

of French agriculture (on the lines of Vauban and Boisguilbert) In his first

significant economic publication, the article Fermiers in the Encyclopedie (1969,

159–92), he identified two distinct methods of cultivation There were some tively prosperous farmers making substantial investments and obtaining high returns Much of France, however, was cultivated by share-croppers using oxen instead of horses, with less investment (usually financed, at least in part, by the landowner), and much lower returns (1969, 159–68) 17 He estimated the output

rela-of grain at 42 million septiers , far below the potential, which he put at 70 million septiers (173)

Quesnay’s most essential contribution was to emphasize that best practice

methods of farming required substantial investment ( advances ) Poor farmers

were poor because they could not afford the investment needed to improve their holdings Quesnay blamed the taxation system, which put an excessive burden on the cultivator, and government price controls and restrictions on trade, which held the price of grain at a low level What was needed was a change in policy that would allow farmers to invest This emphasis on the need for productive invest-ment to increase output was substantially new It need not be discussed in detail here, because it is well known, though it is surprising how little stress some commentators put on it – perhaps because the importance of investment, like the notion of continued growth, is now taken so much for granted that it is difficult

to see that it could not be taken for granted in the eighteenth century

A particularly clear example of his analysis of the gains from better policies is

in a section of the Philosophie Rurale (Meek 1963 , 138–49) which Meek has

attributed to Quesnay 18 At the beginning of the period under discussion, ture is in a state of “decline”, but then “full freedom and security of internal and

agricul-The concept of growth 19

external trade in corn” are allowed, so the price rises, while indirect taxes and the like are abolished The agricultural surplus rises, but rents are only adjusted over

a period of time, as leases are renewed In the interim, farmers get a windfall, and invest it, raising output Quesnay provided a table showing the increased advances

in successive years, as the process works itself out Meek compared this to

“modern growth models of the Harrod type” ( 1963 , 142n), and similar analyses scattered through Quesnay’s writings can be used to produce a “Physiocratic model of growth” (Eltis 1984 , 39–67), or to justify a claim that Quesnay’s subject was “development” (Vaggi 1987 , 3)

There is no doubt that Quesnay thought a change in policy could stimulate a large increase in agricultural output over a period of years The question here is whether he, like all his eighteenth-century predecessors, thought that the adoption

of better policies would lead to a once-for-all increase in output (even if it took a considerable number of years to come through), or whether he anticipated Smith

in thinking of continuing growth as a normal feature of the system, independent

of any specific stimulus He certainly thought that output and population had declined in the past 19 His calculations include examples of decline as well as growth (for example, Meek 1963 , 186–202), so substantial parts of his work are compatible with a view in which (short- to medium-run) increases and decreases

in output are treated symmetrically It remains to be seen whether he thought that continuing growth would become the norm if physiocratic policies were adopted

Discussion of Quesnay’s economics has focused on a related, but slightly different issue Ronald Meek (among others) has argued that (in Quesnay’s story) the whole “net product” of agriculture eventually accrues to landlords when rents are renegotiated, leaving farmers’ profits as a disequilibrium phenomenon (Meek

1963 , 297–312) Gianni Vaggi ( 1987 , chap 5), on the other hand, argues that only part of an increase in (net) output goes to the landlord, so profit is a normal feature of Quesnay’s system Both sides agree that Quesnay was inconsistent, though Meek seems to me to have much more direct support from the texts Vaggi discounts Quesnay’s repeated and explicit statements by claiming that they were designed for an aristocratic audience, and did not represent his true views Without very clear indications as to which represents the “true” Quesnay (or, indeed, whether he ever made up his mind at all), it seems to me risky to pick and choose among his writings in this way In any case, what matters here are the implications for Quesnay’s theory of growth

If Meek is right, and profit is eliminated when leases are renegotiated, it would

be very difficult to claim that Quesnay had a theory of continuing growth through reinvestment of profit Even temporary growth would be hard to account for – Vaggi points out that there would be little incentive for the farmer to invest if all the gains were to be taken away (1987, 153) 20 On the other hand, even if farmers retain some profit in the long run there is no assurance that growth will continue indefinitely, since there is no reason to assume that the normal profits of farming (as opposed to the exceptional temporary profits created by a change of tax regime) would provide either the means or the incentive for continued investment 21

20 The invention of economic growth

Vaggi’s argument appears to be based on the presumption that the physiocrats had a view of growth similar to that of the classics, and that they must, therefore, have seen profits as permanent (for example, 1987, 152), but that is precisely what is in question here Quesnay’s examples typically deal with the response of farmers to exceptional opportunities following a change of policy, and they give little clue to his view of the long run

Discussion of Quesnay’s attitude to profit, then, does not settle the issue The fact is that Quesnay never set out a clear view of the prospects for long-run growth because he did not need to He thought that output and population had fallen massively, so simply to recover this lost ground would be a glittering prize

He certainly thought that there was a great deal of potential for growth – in

Fermiers (1969, 173; discussed above), he describes a potential increase in

agri-cultural output of two thirds – but he thought this sort of increase could be achieved quite quickly – “a kingdom can in a short time progress to a high degree

of power and prosperity” (Meek 1963 , 81) In the numerical example discussed above, a reform of taxes and prices leads to an immediate doubling of farmers’ annual advances (from 450 to 965 millions), and a very impressive rate of growth during the nine years the process would last In that case, Quesnay stated quite explicitly that the process ends when leases are renewed – if leases lasted eighteen years instead of nine, he remarked, then the arithmetical progression, even allow-ing for various initial obstacles, “would even extend beyond the limits of a great kingdom” (Meek 1963 , 147) 22 It is certainly possible to construct models of

continuing growth based on Quesnay’s Tableau Economique , but such models do

not show that Quesnay himself ever extended his treatment to deal with ing growth (as I have defined it) 23 He was concerned with an immediate policy issue – the dreadful state of the French economy – and he saw the possibility

continu-of very large medium-run gains if physiocratic policies were adopted 24

The Tableaux functioned as a series of finger exercises showing the short- to

medium-run effects of policy changes, and that was all he needed

Many commentators implicitly credit Quesnay with a notion of continuing growth, despite the fact that no-one before him had ever formulated such a view, 25 and that he thought that the historical record showed decline, not growth Those who wish to credit him with such a major innovation must provide specific, explicit examples from Quesnay’s own writings The best I can find is a single

paragraph in the encyclopedia article “ Grains ”, in which he argued that

popula-tion growth would generate increased demand for corn, keeping its price up, stimulating further development and thus further population growth (1969, 207) Here, I agree, there seems to be a genuine cumulative process at work, and the reference to population growth suggests a long time scale On the other hand,

Quesnay’s own word for this process was the “restoration” ( rétablissement ) of

agriculture, and he set it in the context of a (static) comparison of present revenues

with those that could be achieved, given la bonne culture He threw in a slightly

obscure paragraph implying that the present state of affairs was the result of a

“devastation” of the countryside during the previous decades (208) – therefore even a very substantial growth in population would have been, in Quesnay’s eyes,

The concept of growth 21

no more than a recovery to previous population levels Quesnay undoubtedly had the makings of a theory of growth, and it is hard for us to avoid reading a notion

of continuing growth into his writings, but I see no evidence that he ever ered the question It is not unusual in the history of ideas to find that the makings

consid-of an answer have been provided before the question itself is posed 26

Hume

David Hume (1711–76) is, of course, now known mainly as a philosopher; among economists he is also recognized for his contributions to monetary theory and to the theory of international monetary adjustment 27 His comments on economic growth and development are scattered through his essays on economic

subjects (1955) and (very thinly) through his History of England ([1754–61]

1826) 28 Unlike almost all his predecessors, he recognized the fact of growth very clearly: “The bounds of all the EUROPEAN Kingdoms are, at present, nearly the same as they were two hundred years ago; But what a difference is there in the power and grandeur of those kingdoms? Which can be ascribed to nothing but the encrease of art and industry” (1955, 24; see also 37, 42–43, 51–52, 78) The

History contains repeated contrasts between the present and past state of commerce and production in England The account of development in England given in the History helps to link together the rather scattered comments in Hume’s economic essays Development 29 is a process of increasing “refinement”, driven by a shift of demand towards more luxurious manufactured goods and by

a parallel growth in the capacity to produce them or to obtain them by trade Before the Roman invasion, “as [the Britons] were ignorant of all the refinements

of life, their wants and their possessions were equally limited” ([1754–61] 1826, 1:3) Feudal England had “made slender advances in refinement” (2:94), commerce was underdeveloped, which kept the inhabitants poor, while the barons had no demand for “elaborate manufactures” (2:98) By Elizabeth’s time, the nobility were acquiring a taste for “elegant luxury”, and “this new turn of expense promoted arts and industry” (5:429) but, even in James I’s reign, manu-facturing was still “very contemptible”, by later standards (6:158) James’s reign, however, saw a greater increase in “all the advantages which distinguish a flour-ishing people” than ever before (6:157–58), and the period from the restoration

to 1688 saw an even more rapid advance in “commerce and riches” (8:288) Throughout the story, changes in “manners” or, in modern terms, changes in tastes, are the prime mover

Hume’s population theory was eclectic He argued that population could ply rapidly, given the chance, but he stressed social as well as economic constraints In a number of places he implied that population grows or declines according to the success of the economy (as most of his contemporaries did), but his most substantial analysis of population, the essay “Of the Populousness of Ancient Nations”, was mostly devoted to social factors affecting ancient socie-ties, such as limitations on marriage between slaves At the same time, he empha-sized the effect of incentives on labor supply, through the labor/leisure choice

multi-22 The invention of economic growth

Increased taxes may, under some circumstances, induce more work (1955, 83), implying that effort is variable and is not normally at its maximum A demand for luxuries, provided they are available, induces more work

Where manufactures and mechanic arts are not cultivated, the bulk of the people must apply themselves to agriculture; and if their skill and industry encrease, there must arise a great superfluity from their labor beyond what suffices to maintain them They have no temptation, therefore, to encrease their skill and industry … A habit of indolence naturally prevails The greater part of the land lies uncultivated

(Hume, 1955 , 10; c.f Steuart, discussed below) Capital accumulation plays only a minor role in Hume’s story Thriving commerce leads to accumulation of wealth in the hands of merchants (53–54); some accumulation is clearly necessary for the growth of commerce, which is in turn a major factor in development At the same time, there is no mention of investment in production, as opposed to trade 30 Luxury, he thought, is generally

a good thing, because it generates a demand for manufactures It only becomes

“vicious” when it “engrosses all a man’s expence, and leaves no ability for … acts of duty and generosity” (30) He made no mention at all of saving as a desir-able use of income Can one imagine the same omission in Adam Smith? Land scarcity played no role either – successful commercial nations are often those with the least land (83)

A taste for manufactured goods allows specialization and induces a shift from barter to a money economy, improving incentives, and giving greater opportuni-ties to learn new methods and to develop new products Foreign trade plays a key role

In most nations, foreign trade has preceded any refinement in home factures … Thus men become acquainted with the pleasures of luxury and the profits of commerce … And this perhaps is the chief advantage which arises from a commerce with strangers It rouses men from their indolence … Imitation soon diffuses all those arts; while domestic manufacturers emulate the foreign in their improvements

(13) Had [our neighbours] not first instructed us, we should have been at present barbarians; and did they not still continue their instructions, the arts must fall into a state of languor, and lose that emulation and novelty, which contribute

so much to their advancement

(79) Development is not automatic, at least in its early stages Development in England was in part, though only in part, a matter of catching up with the conti-nent On the other hand, development is, at least to some degree, irreversible

The concept of growth 23

If foreign markets dry up, the skills and habits stimulated by trade can be turned

to production for the home market (14)

Hume’s forceful assertion of the fact of economic growth is a first step towards the classical view By the mid-eighteenth century the fact of growth in Britain (not France) was widely recognized, though it was most often seen from a mercantilist viewpoint, as a reflection of competitive success relative to others (which in part, of course, it was) 31 Hume’s account of the process of develop-ment differed from Smith’s in almost every detail Instead of stressing the quan-titative growth of the capital stock through saving, he emphasized changes in the pattern of resource use and in the productivity of given resources as a result of changes in tastes and the introduction of new products

His theory was an eclectic compound of the ideas current at the time – a sion of differences between countries reminiscent of Montesquieu (in terms of the

discus-“spirit” of the people, the climate, and the fertility of the soil), a view of economic history and economic development evidently taken from Hume, a recognition of the poor state of agriculture in the tradition of Boisguilbert, Vauban, and Quesnay,

a treatment of international competition similar to that found in Cantillon, and so

on – but he was unable to put it together into a coherent whole Perhaps the best way to make sense of his work is to treat it as containing (at least) two separate elements – an account of a once-for-all transformation, or process of develop-ment, from a state of “simplicity” to one of “luxury”, plus an analysis of fluctua-tions or quasi-random shifts in the level of resource utilization once the state of

“luxury” is attained Neither amounts to a theory of continuing endogenous growth in an already developed economy, of the kind the classical economists took for granted

Steuart described a number of different possible types of society, or stages of development The most important contrast is between a state of “simplicity” and one of “luxury” In a state of simplicity, farmers do not produce much food over and above their own needs, because there are few attractive manufactured goods

to trade their produce for, or because their wants are few (c.f Hume above)