The classical and the Austrian schools and their allies have developed virtually all of the great positive truths of economic science.
Adam Smith . . . shunted economics on to a false path. . . . Under Ricardo, this unfortunate shift in focus was intensified and systematized.
—Murray N. Rothbard
Until the Keynesian revolution in the 1930s, most economists taught the sound principles of classical economics: free trade, balanced budgets, the gold standard, and laissez faire. Adam Smith (1723-1790), the founder of classical economics, has been lionized as the foremost exponent of these principles. David Ricardo, Thomas Malthus, and John Stuart Mill, among others, have played supporting roles.
Many free-market economists congratulate Adam Smith for his profundity and wisdom in The Wealth of Nations, published in 1776. His work almost singlehandedly destroyed the mercantilist arguments for protectionism and other forms of government intervention. George Stigler concludes, It’s all in Adam Smith.
In his monumental new book Capitalism, George Reisman carries on this tradition of extolling the virtues of Adam Smith and David Ricardo (1772-1823). In his judgment, there are four great economists, whom he ranks in the following order: Ludwig von Mises, Adam Smith, David Ricardo, and Eugen von Bohm-Bawerk. Although he does not ignore their weaknesses, Reisman considers Smith and Ricardo great economists who have been much maligned.
But consider Murray Rothbard’s critique of classical economists in his two-volume work Economic Thought Before Adam Smith and Classical Economics, published at the time of his death in January 1995. He lambastes Smith, Ricardo, and Mill, among others, arguing that the classical economists moved away from the sound doctrines and theories previously developed by pre-Adamites such as Richard Cantillon, Anne Robert Turgot, and the Scholastics. According to Rothbard, Adam Smith’s contributions were dubious, he originated nothing that was true, whatever he originated was wrong, and The Wealth of Nations is rife with vagueness, ambiguity, and deep inner contradictions. He has little better to say of Ricardo and Mill.
How can free-market economists see things so differently? Having read both Reisman and Rothbard, as well as the major works of Smith and Ricardo, I have an answer: Smith and Ricardo were largely right on policy, but often wrong on theory.
A Critique of Classical Economics
If you look at the theories developed by the classical economists, you can easily find fault. Smith advanced an exploitation theory of labor, referred to the work of ministers, physicians, musicians, orators, actors, and other producers of services as unproductive, frivolous occupations, and made a distinction between production for profit and production for use. All of these Smithian concepts gave ammunition to Karl Marx and other socialists.
Ricardo furthered the Marxist cause by implying that profits could only increase at the expense of workers’ wages, which tended toward the subsistence level. As rents earned by idle landlords increased, profits would decline, he predicted. He also invented what economists call the Ricardian Vice, whereby theorists build models based on false and misleading assumptions that lead inexorably to the desired results. Ricardo used this device to prove his labor theory of value. As a result, some commentators have identified Ricardo as the source of today’s highly abstract, mathematical, and ahistorical theoretical model-building.
Despite these theoretical blunders, Smith and Ricardo were consistent defenders of laissez-faire capitalism. Smith ably defended the right to immigrate. He opposed minimum-wage laws, and argued for lower taxes and a simpler tax code. War was bad for the economy, according to Smith. He pleaded for balanced budgets. He spoke favorably about saving and capital investment. His invisible hand doctrine declared that the voluntary self-interest of millions of individuals creates a stable, prosperous society (what Smith called natural harmony) without the need for central direction by the state. Smith viewed free-market capitalism overall as socially humanizing and prosperous, while Marx saw capitalism as dehumanizing and alienating. Smith eloquently promoted the principle of natural liberty, the freedom to do what you wish without interference from the state. His words literally changed the course of politics, dismantling the old mercantilist doctrines of protectionism and human bondage. The Wealth of Nations was the ideal document to accompany the Industrial Revolution.
Despite his pessimism about the future, David Ricardo favored a strict 100 percent gold standard, was opposed to public welfare and the corn laws, and was a firm believer in free trade.
In short, the classical economists had much to offer the world. Their theories weren’t always on target, but they usually proposed the right solution.
4. For critiques of Ricardo, see Graeme Donald Snooks, Economics Without Time (Ann Arbor, Mich.: University of Michigan Press, 1993) and Elton Mayo, The Social Problems of an Industrial Civilization (Cambridge, Mass.: Harvard University, 1945).