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Published online by Cambridge University Press: 07 November 2014
The literature on the relationship between Keynesian and classical economics lays almost exclusive emphasis on monetary phenomena; relatively little attention is paid to technological relationships, although an understanding of the precise nature of the production function assumed in each system is clearly of relevance. In particular, the assumption of variable proportions between inputs is crucial to Keynes' approach, and it is usually taken to be an assumption of classical writers too. At times, it is recognized that the classics denied the possibility of obtaining additional output by increasing the quantity of labour used with other (given) inputs, but rarely is this seen as important. The customary interpretation possibly derives, in part, from the fact that the classics made use of the wages fund theory whereby full employment of labour is assured; attention is diverted, by this theory, from technological capital to wage-goods capital, and it becomes easy to jump to the conclusion that output in the classical system can be regarded as a simple function of the quantity of labour employed.
In this paper I shall argue that in fact considerable attention was given to the assumption of fixed coefficients of production in classical economic literature (Section I). It will be necessary to show how this assumption could reasonably be maintained by writers who, at the same time, advocated the wages fund theory (Section II). In concluding the paper, I shall suggest a possible implication of the classical authors' approach to technology for their macro-economic policy, in particular for their tendency to minimize the significance of aggregate demand as a determinant of aggregate output (Section III).
1 See for example the seminal papers by Hicks, J. R., “Mr. Keynes and the Classics; A Suggested Interpretation,” Econometrica, V, 01, 1937, 147–59CrossRefGoogle Scholar, and Modigliani, Franco, “Liquidity Preference and the Theory of Interest and Money,” Econometrica, XII, 01, 1944, 45–88.CrossRefGoogle Scholar By “classical economics” we shall mean in this paper the body of “orthodox” economic thought in Britain from Smith to the 1870's.
2 An exception is to be found in Sraffa, Piero, Production of Commodities by Means of Commodities (Cambridge, 1960).Google Scholar See in particular v–vi.
3 Mill, J. S., Principles of Political Economy, 7th ed. (1871), ed. Ashley, W. J. (London, 1920)Google Scholar; cited hereafter as Principles.
4 This was the view both of Keynes and Schumpeter. See Keynes, J. M., The General Theory of Employment, Interest, and Money (London, 1957), 18 Google Scholar, and Schumpeter, J. A., A History of Economic Analysis (New York, 1954), 383.Google Scholar
5 Principles, Book I, 63.
6 Cannan, Edwin, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848, 3rd ed. (London, 1924), 119.Google Scholar
7 Ibid., 118.
8 “On Profits and Interest,” in Essays on Some Unsettled Questions of Political Economy, 1st ed. (1844), reprinted by the London School of Economics and Political Science (1948), 90–1.Google Scholar
9 Principles of Political Economy, Sraffa, P., ed., The Works and Correspondence of David Ricardo, I (Cambridge, 1951), chap. xxxi.Google Scholar Blaug, Mark in Ricardian Economics: A Historical Study (New Haven, 1958), chap, ivGoogle Scholar, has recognized that the Ricardo effect plays a minor role in Ricardo's thinking. He also implies (p. 70) the generality of the assumption of fixed coefficients: “… the machinery chapter opens up a whole series of unanswered questions about Ricardo's system. Firstly, the chapter abandons the assumption of fixed technical coefficients of production …”
10 The relevant section in Mill's Principles is Book I, chap, vi, “On Circulating and Fixed Capital.”
11 Principles, I, 67.Google Scholar In fact Mill also allows the government to have “implements and materials” at its disposal.
12 Ibid., II, 343–4. A clear statement of the all-inclusive nature of the wages fund theory is also to be found in Mill's own summary in the celebrated “recantation”: “It will be said that … supply and demand do entirely govern the price obtained for labour. The demand for labour consists of the whole circulating capital of the country, including what is paid in wages for unproductive labour. The supply is the whole labouring population.” Quoted in Ashley's Bibliographical Appendix O, ibid., 992, from Dissertations and Discussions, IV, p. 42.Google Scholar
13 Say's Law is postulated by Mill as an equilibrium proposition; he allows that there may be “temporary” crises due to hoarding. In brief, Say's Law is not an identity, but an equality. Cf. Becker, G. S. and Baumol, W. J., “The Classical Monetary Theory: The Out-come of the Discussion,” Economica, XIX, 11, 1952, 355–76.CrossRefGoogle Scholar Yet it is difficult to understand why so little emphasis was placed upon the admission that an excess of aggregate output was a possibility, and why the full implications of the admission were not explored.
14 It can be shown, for example, that as a result of rigidity of technology a fall in aggregate demand may not lead to reduced activity and unemployment in the productive sector even if money wages are inflexible. Inflexible money wages may at worst create unemployment in the unproductive sector only, an event of relatively little import to the classical writers. This particular case is discussed in the Appendix.
15 Principles, I, 79.Google Scholar
16 Dobb, M. H., Political Economy and Capitalism, rev. ed., (London, 1940), 45.Google Scholar Mr. Dobb points out that the proposition depends upon the assumption “like so much of Ricardian reasoning … that the proportions between capital and labour were equal in all industries.” It may be added that it depends on a further implicit assumption that fixed capital is homogeneous and can be used in any industry. Mr. Dobb's interpretation is essentially accepted by Johnson, H. G., in “Demand for Commodities Is Not Demand for Labour,” Economic Journal, LIX, 12, 1949, 535 Google Scholar, although Professor Johnson goes on to draw the full implications of the proposition.
17 Principles, I, 64.Google Scholar
18 That the need for available fixed capital is in fact taken seriously can be seen from further comments on “domestic” or “family” manufacture: “In winter … the whole family employ themselves in it: but as soon as spring appears, those on whom the early field labours devolve abandon the in-door work; many a shuttle stands still; … till at last, at the harvest … all hands seize the implements of husbandry; but in unfavourable weather, and in all otherwise vacant hours, the work in the cottage is resumed …” ( Principles, III, 683 Google Scholar) At the same time, it is clear that Mill often contravenes the implicit assumption that technical coefficients are identical everywhere, for in the case of domestic manufacture the capital-labour ratio is apparently lower than in other industries. However, the assumption is really most relevant for the case of changes in demand between products rather than for the case of a general increase in demand with which he is here concerned.
19 Principles, III, 684.Google Scholar
20 In the extreme case of similar firms, if rigid money wage rates are postulated, a reduction in aggregate demand will create unemployment, but, with minor exceptions, this would affect the improductive sector only. See Appendix.