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On Smith, I haven't read him, but I'm wondering to what extent he conceived of the concept of long term system wide per capita economic growth. Or in other words, did he buy into the just emerging belief in Progress and if so, how did he understand it?

Yes and no.

Smith argues that in the steady state, labour will be remunerated at a subsistence level (as will capital, by the way). However, as long as the economy is "improving" - that is, as long as society as a whole keeps getting richer, wages (and profits) can remain above subsistence level, because there is a time delay between the increase in demand for labour and the increase in its supply, which creates a shortage that allows for prices to rise. In the same way, of course, a declining society will push wages below subsistence level, leading to fewer people.

If this sounds tautological - people can get richer when people get richer - then that is because Smith does not have a good model of economic growth. He observed that it happened, and you can certainly re-cast much of what he wrote about growth in modern terms like increasing capital intensity or aggregate demand driven technological progress. But he doesn't quite present a convincing synthesis himself. His comparisons between China and England indicate that he believed that there is some physical limit to growth, related to how much crop you can get out of land. But it is never spelled out explicitly.

If you need eighty percent of the population working full time just to produce enough calories for themselves and everybody else, then there's not much room for the population as a whole to have well above subsistence standard of living.

Indeed, this is an important - no, essential - point for anybody who wants to understand the early classical economists. Agricultural land was the most important factor of production. Bar none, and it's not even a close contest. This is what lead the early classical economists to propose that labour and capital would end up, in a steady state, being remunerated at a subsistence level, because the bulk of the surplus value from production is captured by the constraining factor of production.

When Smith was writing, this factor of production was agricultural land. When Marx was writing, it was capital. When Keynes was writing, it was financial assets. When Galbraith was writing, it was specialised labour and sophisticated organisation. (Today we're back to financial assets, and re-fighting Keynes' fights...)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 14th, 2010 at 02:52:03 AM EST
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