An Outline of the history of economic thought - Chapter 2 ppsx

2 The Laissez-Faire Revolution and Smithian Economics 2.1. The Laissez-Faire Revolution 2.1.1. The preconditions of the Industrial Revolution The 35-year period from the beginning of the Austrian War of Succe ssion in 1741 to the American Declaration of Independence in 1776 was of critical importance for the history of Europe as well as for the history of economic thought. It was a period of profound political crisis, as shown by the 25 years of war, among the most barbarous in European history, at one time or another involving each of the great powers: the Austrian War of Succession (1741–8), the colonial war between England, France, and Spain (1754–63), the Seven Years War (1756– 63), and the Russian–Turkish War (1768–74). One of the main results of this political crisis was the beginning of England’s military, political, and economic dominance in Europe. An important economic transformation of this period was the spread of capitalism in the countryside, which was a fairly rapid process in France and England. In France, at least in the northern regions, Picardy, Normandy, and the province of Paris, a new social figure emerged: the fermier, a tenant farmer who invested his own money in the improvement of productive techniques and in the enlargement of his farm. In England, the process was facilitated by the enclosure movement which, begun more than two centuries before, experienced a real boom from 1760 onwards. Among the most important consequences were the major technical innovations in cultivation methods, the connected increase in agricultural productivity and production, and the acceleration of the expulsion of the agricultural workers from the countryside. If we add the fact that, beginning from 1740, there was an acceleration in demographic growth, it is easy to understand why the take- off of the Industrial Revolution that occurred towards the end of this period was not hindered by lack of workers (and ‘means of subsistence’) which had been one of the main concerns of the mercantilists. Thus industrial employment could increase rapidly from the 1770s onwards. An important precondition for the take-off of the Industrial Revolution was the large number of technical innovations in the new industries, above all (but not only) in the textile industry: Hargreaves’s spinning-jenny was invented in 1764, Watt’s steam-engine in 1765, and Arkwright’s water-frame in 1768. This process was not limited to England. To give only a few more examples: in 1769 Cugnot constructed a steam-driven carriage, a prototype of the motor car, in France; while Volta in Italy invented the condensor electroscope in 1775, and constructed the electropho rus and discovered methane gas in 1776. Thus all the economic, social, and technological preconditions for industrial take-off were laid down in this period. Most important of all, however, were the cultural preconditions. This was the period of the eruption of that authentic cultural revolution known as the Enlighten ment. The roots of this movement can be traced back to seventeenth-century England and, in particular, to the ideas of ‘reason’, ‘experience’, and ‘science’ with which philosophers and scientists such as Bacon, Locke, and Newton had tried to oust old idols and to sweep away traditional intellectu al servitude. On the Continent, by grafting itself onto different national traditions, this movement assumed special characteristics, becoming rationalist in the homeland of Descartes and historicist in that of Vico. Its most destabilizing impact on the culture of the period occurred between 1751 and 1776, the years in which the Encyclope´die was published. The Enlightenment played an important role in the history of economic thought. It supplied the philosophical bases of the attack the economists of this period were attempting against mercantilist thought. The years 1751–76 are, in fact, for economics, the years of the laissez-faire revolution. Mer- cantilism, a relatively homogeneous theoretical system that had dominated European thought for 300 years and had almost created an international scientific community, was suddenly attacked from different positions, and disappeared from the scene in a quarter of a century. In their turn, however, the new economists did not present a homogenous theoretical approach, either within each nation or at the international level. They did begin to group themselves into authentic ‘schools’, or almost, such as that of the physiocrats in France and the Milan and Naples schools in Italy; but, as we will see later, there was little theoretical homogeneity among the schools and little even within them. The only argument that united them was, in fact, a negative one: their struggle against the traditional mercantilist orthodoxy and, connected to this (apart from a few exceptions), their attempt to give a scientific foundation to the laissez-faire doctrine. It was necessary to wait for Smith’s 1776 synthesis to find the conditions that were to lead, in the following forty years, to the formation of a new orthodoxy on a Continental scale. 2.1.2. Quesnay and the physiocrats The physiocratic school that prevailed in France during this period was a true school of thought, with a doctrine to defend and propagate, a recog- nized master, Franc¸ois Quesnay, and a fervent group of followers. We have insufficient space here to mention all the physiocratic economists; so we will 55 laissez-faire and smithian economics limit ourselves to presenting the essential lines of thought of the master, whose most important economic work was the Tableau e´conomique (1758). The physiocratic scientific contribution was outstanding. Four points in particular are worth underlining: (a) the notions of productive and unproductive labour, by means of which the real source of wealth was found in the net product obtained by applying labour to land; (b) the idea of interdependence among the various productive sectors and the related idea of macroeconomic equilibrium; (c) the representation of the economic exchanges as a circular flow of money and goods among the various economic sectors; (d ) the displacement of scientific interest from the stock of wealth to the flow of net product. Quesnay assumed that the productive cycle lasted one year, and that the final product of each year was partially consumed and partially re-utilized as a necessary input for the following year. He focused on agricultural produc- tion, the only sector capable of producing a surplus over replacement costs and the only real source of wealth. The physiocrats considered the surplus as a kind of natural gift from land. The farmers, therefore, formed the ‘pro- ductive class’. The people employed in manufacturing industry, on the other hand, made up the ‘sterile class’, not because they did not produce useful goods, but simply because the value of their output was considered to be equal to the overall value of the inputs. Finally, there was the class of landlords, or ‘distributive class’, whose economic role was to consume the surplus created by the productive class and to begin, by the expenditure of the rents, the circulation process of money and goods among the various economic sectors. The physiocrats called this circulation process ‘distribu- tion’. This is the derivation of the name ‘distributive class’: its function was to ensure an effective ‘distribution’ of the income and goods among the various sectors. The tableau e´conomique model is fairly simple. In one year the agricultural sector produces an output of five milliard livres. From this total, 1 milliard replaces the means of production consumed in the agricultural process, and two milliard are used to pay the wages of the farm hands and the profits of the fermiers as well as to provide seeds for the following year. The other two milliard repres ent the surplus, the produit net. The manufacturing sector has an output and an input of two milliard livres. The tableau shows how the products of the two sectors are ‘distributed’ in the system and how the circulation of money ensures a continual repro- duction of the system. Fig. 2 shows the three social classes and the flows of money by means of which they exchange goods. At the beginning of the year, the productive class pays two milliard in rent to the distributive class and one milliard to the sterile class to buy manufactured articles, and spends two 56 laissez-faire and smithian economics milliard within the agricultural sector to buy raw materials, wage goods, and means of production. The distributive class will spend its income in the following way: one milliard to the sterile class and the other one milliard to the productive class to buy, respectively, manufactured goods and agricul- tural products. The sterile class, which has received two milliard, half from the distributive class and half from the farmers, will spend it all on the productive class to buy its inputs and necessary consu mer goods. Finally, the three milliard that the productive class has spent outside the agricultural sector will come back to it; so that the cycle can begin again. Quesnay derived two important political consequences from this model. The first concerns the ‘natural’ ability of an economic system to reproduce itself, as long as it is not obstructed by inter ventions of the political authorities. The reproduction equilibrium in which the system finds itself can be defined as a situation in which each sector supplies the other sectors with exactly the quantity of inputs requested, so that functional relationships are formed among the various sectors and classes which are very similar to those suggested in Menenio Agrippa’s apologue. Quesna y was a medical doctor, and studied the economic system as if it were a natural organism. The equilibrium in which the economy naturally found itself was seen as a manifestation of the natural order of things. Here the influence of natural-law philosophy is apparent. In drawing out political implications, however, Quesnay was more coherent and extremist than Locke, who had also been strongly influenced by natural-law philosophy. With respect to the natural order, the best that could be done by the ‘positive order’, or the laws and institutions of organized society, was not to interfere. In this way, so it seemed, Gournay’s maxim—‘laissez faire, laissez passer les marchandises’—was ‘scientifically proved’. In fact, the goods would go by themselves where they had to go to satisfy society’s reproduction conditions. The second political implication of the physiocratic model concerns the doctrine of the impoˆt unique. This brought to its logical conclusions an argu- ment that had already been sketched out by Vauban and Boisguillebert at the Productive class 1 milliard 1 milliard 1 milliard 2 milliards 2 milliards 2 milliards Non-productive class Distributive class Fig.2 57 laissez-faire and smithian economics beginning of the century: that the best that could be done by the central authorities in regard to public finance was to eliminate all that complicated and inefficient fiscal apparatus, inherited from the Middle Ages, which only hin- dered the free circulation of goods and free private initiative, besides making tax collection expensive and difficult. The plan was to impose a single tax on the only productive factor, land, which would be paid with the net product. The other incomes would be spent on ‘necessary consumption’ essential to the production process, so they could not be eaten away in real terms. Taxes raised on these incomes would have been transferred and would in the end, in any case, have fallen back on rents. It would be better, therefore, to tax the latter directly. Quesnay had numerous followers, but we have no space to recall all of them. Something however has to be said about Anne Robert Jacques Turgot and E ´ tienne Bonnot Condillac, two economists who, while being influenced by physiocratic thought, distanced themselves from it in various respects. The former criticized the physiocratic thesis according to which only land is able to produce a surplus. Besides this he put forward some interesting ideas about the decreasing returns generated in agriculture by the intensification of investment. Finally Turgot tried to formulate an estimative theory of value, based on concepts such as utility and scarcity—a theory that did not fit very well with the physiocratic conception of the prix fondamental , namely, the conception of cost value as determined by production conditions. It is also worth mentioning the more systematic subjective theory of value put for- ward by Condillac, a theory much influenced by Galiani’s work, especially in the treatment of exchange between present and future goods. Condillac differed from Galiani in that he adopted a traditional concept of utility, considering it as an intrinsic quality of goods. He also distanced himself from Turgot when he refused to accept the view that contracting parties draw the same advantage from an exchange. Lastly, Achylle Nicolas Isnard, an engineer who devoted his life to eco- nomics, also deserves a word of mention. Although influenced by Physio- cratic thought, he rejected the theory that only the land is productive. In point of fact, the agricultural sector had begun to lose its e conomic superi- ority in France already in Quesnay’s time. This partly explains the rapid decline of the Physiocratic contribution at the end of the eighteenth century. Isnard, however, assimilated the idea of sectoral interdependences and proposed them initially as a mathematical model of general economic equilibrium that took production, money, capital and exchange into account. Isnard developed perhaps the first rudimental, yet surprisingly modern, model of general economic equilibrium. 2.1.3. Galiani and the Italians The period 1750–80 has been defined by Bousquet as the aˆge d’or of Italian economic thought. It was as if the Enlightenment in Italy had chosen 58 laissez-faire and smithian economics economics as its favourite subject. There were numerous interesting eco- nomists in this period, of whom we mention here only the most significant. First of all, Ferdinando Galiani, the most important exponent of the ‘Neapolitan school’. In Della Moneta (1751) he made an ambitious attempt to construct a general theory of utility value, while, in Dialogues sur le commerce des bleds (1768), he attacked physiocratic thought and its theories of economic policy. Other two notable Neapolitan economists are Antonio Genovesi, who was considered the ‘head of the great family of Italian economists’, and Gaetano Filangeri, who proposed a vast illuminist project of economic and political renovation. Two economists of the Milanese school are Cesare Beccaria and Pietro Verri, while Giammaria Ortes, an economist from Venice, did not belong to any school. One of the common traits of Italian Enlightenment during this period was its insistence on public happiness as the main subject of study in economic science. The word happiness appears in the title of almost all the treatises of these economists. In point of fact, this budding discipline was given the task of discovering the conditions for enhancing public happiness, intende d as a form of interesse (interest) that was superior to the individual one. Thus it was in the context of the innovative atmosphere of the Neapolitan Enlightenment, during the reign of Charles III of Bourbon (1734–59), that the civil economy theoretical system began to take shape, as a modern re-visitation of typical civil humanism themes. In 1753, the University of Naples set up the first academic chair in economics in the world—more precisely, in ‘Civil and Mechanical Economy’. Its first professor, the Salernitan Antoni o Genovesi, ch ose the title of Lezioni di economia civi le (Lectures on Civil Economy) for his treatise of 1765. He wrote: ‘Labour in your own inter est; no man can work other than for his own happiness; for he will be less than a man; but if you are able, and as far as you are able, strive to make others happy. It is the law of the universe that we cannot achieve our own happiness without achieving that of others’ ( Autobiografia, p. 449). Civil humanism contributed two central ideas to economics: firstly, that technology—and scientific research in general—should be studied as a means for civilizing and improving people’s well-being rather than as an end to themselves; this encouraged mass education programmes. Secondly, the idea that ‘public faith’ ( fides), is the main resource for economic development. Genovesi wrote: ‘Nothing is more essential to widespread and prompt circulation than ‘‘public faith’’ ’ (Lezioni, p. 148), to which he added the footnote: ‘This word fides means cord, which ties and joins. Public faith is therefore the bond that unites families in a companionable life’. This fides is in turn fuelled by the principle of reciprocity and therefore by the market, intended as an economic institution practising ‘‘reciprocal assistance’’. Here we have more than just a simple outline of the present-day notion of social capital, an essential requisite for any socially acceptable development process. 59 laissez-faire and smithian economics Galiani’s most important contribution in the field of theoretical research concerns the theory of utility value, which he took up from his Italian pre- decessors and developed as much as was possible in a pre-marginalist period. He borrowed the theory, according to which value depends on the utility and scarcity of goods, from Davanzati and Montanari, without, however, fully acknowledging the debt. Then he made the following steps forward. First, he argued that value is not an intrinsic quality of goods, as most of the theorists of the cost of production tended to believe, but is a quality deriving from the choices of economic subjects. Second, he established that it is necessary to start from individuals in order to define these choices. Both utility and scarcity depend on the needs of individuals. Thus, the same good has dif- ferent utilities for an individual according to the quantity of it that he has already consumed. The more of the good consumed, the lower the utility will be, up to the point of becoming zero. The concept was only sketched, but it was already a theory of diminishing ‘final’ utility. Third—and this is perhaps the most interesting part of his work, the part that probably led Pareto to consider him as one of his precursors—Galiani endeavoured to study indi- vidual behaviour in terms of choice among demanded quantities of more than one good, that is, in terms of the composition of demand. The funda- mental argument is that value is an idea of proportion between the possession of one thing and that of another in the mind of a man. So, when one says that ten bushels of grain are worth one cask of wine, one expresses a proportion of equality between having one or the other; therefore men, always cautious not to be cheated out of their own pleasures, exchange one thing for another, because in the equality of exchange there is neither loss nor fraud. (p. 39; our italics) Except for the absence of the term ‘rate of substitution’, one would not be surprised to find this passage in a modern microeconomic textbook. Also note the hypothesis of individual rationality expressed in the idea of ‘caution’ of choices. Not only Pareto but also other neoclassical economists could have con- sidered Galiani an important precursor. He was well aware of the line that economic theory was taking in England in his times, and endeavoured to integrate into his work some of the arguments of the economists of that country, especially in regard to the cost of production. In doing so, however, by following a procedure of assimilation and deformation similar to that which was later to be followed by Marshall, he produced something thor- oughly original. Thus he was able to state that, for the goods whose supply can be increased by the utilization of labour, value depends on the ‘fatigue’ ( fatica) sustained in producing them; a view that some people have tried to interpret in terms of a labour theory of value. To understand that it is not so, it is not even necessary to reflect on the meaning of the term fatica, which, in the Neapolitan dialect, while being used 60 laissez-faire and smithian economics as a synonym for work, has a less abstract meaning with a clear implication of toil and sacrifice. It is sufficient to follow Galiani in his calculation of the contribution given by fatica to the value of goods. This contribution depends not only on the time and quantity of labour employed but also on its price. Already this argument is incompatible with a pure labour theory of value. But things become even clearer when Galiani tells us that it is from the ‘different values of human talents [that] the different prices for the ‘‘fatigues’’ originate’ (p. 49). He also maintained that ‘the value of talents’ has to be estimated ‘in the same way as for inanimate things, and that it rests on the same principles of rarity and utility taken together’. In other words, this is a theory of the ‘real ’ cost of production measured in terms of fatica, or toil of labour (or, rather, labours, as talents are heterogeneous), and valued at a price that depends on the utility and scarcity of natural endowments. Galiani also anticipat ed the more recent neoclassical theories of the rate of interest. He tried to explain the interest rate by linking it to the price that must be paid to equate the value of present to that of future money. The necessity of paying this price is derived from the fact that future money is valued less than present money. In fact, among men only pleasure has a price and only comforts are bought; and, as one cannot receive pleasure without damaging and disturbing others, one pays anything else than the damage and the deprivation of the pleasure caused to others. The anxiety caused to somebody is hardship, so it is necessary to pay for this. What is called the fruit of money, when it is legitimate, is nothing more than the price for anxiety. (p. 292) Interest is the ‘intrinsic price’ of the ‘risk’ and the ‘inconvenience’ connected with the ‘delivery of a thing with an agreement to have the equivalent back’ (pp. 291–2) in such a way that there is ‘equalization between present money’ and future money (p. 290). Because of the risk connected with the future repayment of money (although the same point is also valid for real goods), the two sums paid at different time s are evaluated as equal only if they are differentiated by the ‘fruit of money’. Finally, it is important to mention Galiani’s theory of equilibrium and the political consequences he drew from it. In Dialogues sur le commerce des bleds, he criticized some of the physiocratic doctrines. Galiani did not share the Physiocrats’ passion for agriculture. He argued that industry offers advantages for exploitation by the political authorities. In the first place, industrial production is not affected by changes in climate, therefore the prices of its products are more stable than those of agricultural products. Secondly, agricultural production is restricted by the scarcity of land, whereas industrial production is potentially unlimited since it increases with the level of employment. Third, industrial expansion is useful also to agri- culture since it increases the demand for its products. Galiani accepted the Physiocrats’ idea of natural order, which he reformulated in the view 61 laissez-faire and smithian economics that the economy tends spontaneously towards equilibrium: nature ‘settles everything in equilibrium’, as if it were controlled by a ‘supreme hand’; but he introduced an interesting dynamic consideration, by observing that any adjustment would be achieved only in the long run. In the short run, dis- orders and malfunctions could well manifest themselves. But the short run could also last a long time. Therefore, there would be ample leeway and excellent reasons to try to correct those disorders and malfunctions by law. Laissez-faire policy woul d not be justified in the short run. At all events, Galiani did not admit the possibility of establishing general criteria for state intervention in the economy. The most suitable measures would depend to a large extent on the time and place in which they were taken. This pragmatic attitude towards laissez-faire was also present in other Italian economists of the period. Genovesi, Beccaria, an d Verri, for example, were in favour of economic freedom, which they considered from an illu- minist point of view as a manifestation of the more general principle of human freedom. They justified this theoretically with the idea that nature tends to bring human things towards equilibrium if left free to do so—an idea that Genovesi supported with an argument similar to Hume’s price– specie-flow mechanism. In practice, however, they limited this application of free trade to within national boundaries. In regard to foreign trade, they believed that the State had to guide and regulate the flows of imports and exports in the national interest, which might not coincide with the interests of the individual citizens. Generally speaking, it could be said that these eco- nomists had a tendency towards theoretical eclecticism and political prag- matism. For example, they took up the ideas of the French economists on the net product an d, more cautiously, on the single tax, while from Galiani they adopted the theory of value. In regard to policy, especially in monetary matters, they basically remained within mercantilist thought. Filangeri and Ortes were more extreme supporters of laissez-faire. The former took great steps forward in the construction of an illuminist norm- ative syst em, and professed a strong faith in laissez-faire, justifying it with the observation that a reduction of imports would lead to reprisals by competing states and would therefore be followed by a reduction in exports. Ortes, on the other hand, justified his free-trade position with the argument that, in the absence of protectionist barriers, exports and imports of a country would tend to balance. He also constructed an original theoretical system, basing it on the presupposition that national production would be limited by the size of the population, which, in turn, could not grow beyond the provisions made available by the natural endowment of the country. Ortes was also one of the many ‘forerunners’ of Malthus in regard to the population principle, and also anticipated the theory of decreasing returns in agriculture. It is also worth noting some original contributions of Beccaria and Verri. Beccaria sketched out a theory of the division of labour and of increasing returns in industry, besides having an insight about the indete rminacy of 62 laissez-faire and smithian economics prices in a duopoly. Verri developed an elementary theory of the demand curve, which he specified in the form of an equilateral hyperbola. Verri was more critical than Beccaria of the physiocrats. His criticism of the argument that the ‘sterile class’ did not produce a surplus was extremely interesting, and in many ways similar to the one later put forward by Smith. Verri maintained that the production of the various industries must be calculated in value, and that, in terms of value, all the activities which pay profits over and above wages and replacement costs produce a surplus. Beccaria and Verri shared a subjectivist and hedonistic conception of economic phenomena. Starting from a sensist and materialist philosophy, they tried to explain human behaviour in utilitarian terms, by maintaining that individuals are driven, in their economic choices, exclusively by the search for pleasure and the fear of pain. It was not only in this that the two Milanese economists anticipated Bentham, but also in the proposal that the State should aim at creating—in Beccaria’s words—the ‘maximum happiness divided among the greatest number’. Pleasure was even thought to be measurable, and Verri considered that this could be done in monetary terms. 2.1.4. Hume and Steuart In Great Britain, the most relevant contributions in this period were made by David Hume and James Denham Steuart. Hume’s Political Discourses are important for the history of economic thought especially because in them, developing the ideas and methods of Petty and Locke, the foundations were laid down for English free-trade economics. We will briefly outline the theory of the adjustment on the balance of payments based on the price–specie-flow mechanism, already mentioned in section 1.2.5. According to this theory, a surplus on the balance of trade does not produc e permanent benefits, as it automatically activates a re-equilibrating process. In fact, the inflow of gold generated by the trade surplus would cause internal prices to rise, while decreasing those of the competing countries in deficit. Owing to the con- sequent changes in competitiveness, the trade balances would gradually adjust. The free trade implications of this theory are obvious. In regard to money, Hume put forward a dynamic version of the quantity theory in which he recognized that an increase in the supply of money could have relevant, although temporary, real effects. He noted that the increase in prices caused by an increase in the money in circulation would be transmitted gradually from one sector to another as the initial inflow of money was spent. In this transmission process, which is rather similar to the multiplier, the increments in expenditure can also generate, together with price increases, an expansion in production and employment. This is a remarkable acknow- ledgement of the validity of mercantilist theories, at least to the extent that the time interval in which the multiplier process occurs is not well defined. It would have been sufficient to recognize, as Keynes suggested later, that life is 63 laissez-faire and smithian economics [...]... play by the ‘rules of the game’ So the above maxim merely says that a market 82 laissez-faire and smithian economics economy would be in a position to function even if the ulterior motives of all the participants were exclusively self-interested: it is an exaltation of the soundness of the organization of the economic activities permitted by the market rather than a negation of the relevance of the intrinsic... decrease in the rate of profit and, as a consequence, a decrease in the rate of interest Hume’s four fundamental arguments, the price–specie-flow mechanism, the quantity theory of money, the theory of the growth of the volume of international trade, and the explanation of the diminution of interest as a real phenomenon, were to be accepted en bloc by English and European thought, and were to form the pillars... the quantity of labour commanded coincides with the quantity of embodied labour Things change when one passes from a system in which the whole product of the labour belongs to the worker to one in which the control of the means of production, and therefore the production, is no longer in the workers’ hands When capitalists and landlords take part in the division of the product, the exchange value of a... labour, the explanation of value in terms of embodied and commanded labour and, finally, the theory of profit as a residual income, are all elements of the first component The second component, on the other hand, provides the foundation to the theorem of the invisible hand, to the idea of a competitive capitalist economy as a natural economic order, to the theory of additive prices in connection with the. .. in the equation of exchange is the velocity of circulation, which, by means of variations of the amount of money hoarded, continually changes in such a way that the quantity of money in circulation is always adequate for the needs of trade The volume of transactions depends on the level of output, while prices are determined by the forces of competition and the conditions of cost Thus, the value of the. .. sector to another in the search of a higher profit rate In order to understand how these two components of Smith’s theory are really different, yet strictly interrelated, we will consider them at work on a specific problem: that of the explanation of the nature of labour and the level of its remuneration laissez-faire and smithian economics 75 Chapter 5 of Book I of The Wealth of Nations begins thus: The. .. the rate of profit, w and p the monetary wages and the monetary price of one ton of corn p/w will be the labour commanded by it, and w/p the real wage The price of corn will be equal to the sum of the costs sustained in producing it and the profits earned by the capitalists The cost of labour is wl, the cost of capital pk, the profit pkr Therefore, p = w þ pk þ pkr Expressing the price in labour commanded:... variations of market prices on the forces of supply and demand and the other relating to the dependence of natural prices on the conditions of production He thus formulated a theory which was rather more similar to that of Galiani, whose influence was still strong in France, where it had been 86 laissez-faire and smithian economics consolidated by Condillac The value of goods depends on the forces of demand and... price of the good is expressed as a sum of the incomes, but to the interpretation that considers incomes as the primary sources of value In such an interpretation, wages and profits would be determined by the forces of supply and demand in the ‘factor’ markets, so that their sum would determine the value of the good But from the equation of labour commanded it is easy 72 laissez-faire and smithian economics... with the third component in the next section The core of the first two components, which will be dealt with in this section, consists of the theory of surplus and the theory of the individualist competitive equilibrium The philosophical roots of the two theories are different; and it would not be difficult to trace the empiricist and moralphilosophy roots of the theory of competitive equilibrium from the . 2 The Laissez-Faire Revolution and Smithian Economics 2. 1. The Laissez-Faire Revolution 2. 1.1. The preconditions of the Industrial Revolution The 35-year period from the beginning of the. in section 2. 2.6. 2. 2 .2. Accumulation and the distribution of income In 1776 Smith published An Inquiry into the Nature and Causes of the Wealth of Nations, a milestone in modern economic thought. The. which the control of the means of production, and therefore the production, is no longer in the worke rs’ hands. When capitalists and landlords take part in the division of the product, the exchange