Classical Economic Orthodoxy: Adam Smith

The classical economic school gave a scientific theory of market capitalism. Yet classicism was more than a mere study of egoistic behaviour of self-interested individuals in a market venue. Rather, Adam Smith�s Wealth of Nations is a compendium of social and economic issues in which institutions and governments are seen to play distinct roles in attaining efficient organization of markets. Yet the kind of orientation given to public organization in the midst of self-interest, and in this way, the method of externalizing social values through institutions and governments, assume a particular form in this first great revolutionary and monumental work. We will explain this now.

Smith�s first work, The Theory of Moral Sentiments received greater attention during his life than the Wealth of Nations. The latter work became prominent only posthumously. In Moral Sentiments Smith saw human sympathy to be emerging from the springs of natural liberty. The principles of natural liberty respecting human liberty and happiness were made to premise individual, social and institutional aspirations. In methodologically explaining such preferences, Smith wanted to see scientific laws of natural liberty become its part and parcel. Thereafter, institutions became representation of such individual preferences if they were founded on sympathy, ethical behaviour and just exchange for benefiting from the various possibilities that the human order can bestow. Thereby, within such a scientific system endowed by its equilibrium and optimal principles of natural liberty, goods and services comprised not simply purely economic ones but also moral and ethical ones. Today John Rawls calls social and ethical market values to be �primaries� (Rawls 1971). In this sense, Smith emulated Aristotle�s economic thinking in terms of ethical perfection, which the latter wanted to utilize as the attributes of a good society with wealth and politics in it. These points are brought out eloquently in Aristotle�s Nichomachean Ethics (Welldon 1987, Barker 1959). Smith was also like Kant in his moral prerogatives. Kant found epistemological questions of history, society, economy and politics to be embedded in what he called as the universal law of history (Reiss 1970).

But like Aristotle, Smith�s institutions and government were a lateral aggregation of perfect individuals all transformed by a vision of natural liberty in the quest for freedom and happiness characterizing the human order. Institutions just as individuals were thereby, assumed to be capable of attaining the optimal and equilibrium levels of freedom and happiness. The market order characterized by exchange of atomistic individuals then became a necessity for institution to realize this kind of free and non-interventionist attainment of freedom and happiness. 

The natural liberty principle of Moral Sentiments thus led to the emergence of the markets of Wealth of Nations. These were made up of self-interested, optimal and equilibrium modes of exchange and agency under such an atomistic market assumption. Consequently, we find that in such an aggregation of individual preferences toward forming institutional preferences all of economic analysis became an academic venture in optimal allocation of resources. The high moral, ethical and social values earlier conceived by Smith in his Moral Sentiments got washed away in his Wealth of Nations, wherein market exchange and the role of institutions and governments in this order became the prime sway (Coase 1994). 

In the assumed state of optimality and equilibrium allocation of scarce resources among exchangeables, the agents had to become independent of each other, not interactive ones. In this way, the exchange mechanism was invisibly premised on the exchange of atomistic agency, which by selling small and being small while being many, could not explain a process of evolution of market exchange within a scientific paradigm of markets and ethics. In other words, while optimality and equilibrium of resource allocation were assumed to exist, yet it was not known how such an optimum and equilibrium state was attainable through a social process (Shackle 1971). A process is understood here to mean a continuous system of interactions, convergence and re-emergence through a vast nexus of cause and effects (Whitehead 1979). 

In the post-hoc optimal state there cannot exist any sharing possibility between agents, variables and sub-systems (e.g. markets). Hence the possibility of interactions disappears in the long-run optimal state of resource allocation. Agents were assumed to have already conceded at every point of the resource allocation trajectory to consistent optimal and equilibrium states. This is the focus of economic analysis in the classical school. The representation of aggregate preferences of individuals and groups in institution making became stronger in the theory of civil libertarianism propounded by Bentham. From this background the occidental world inherited the idea of utilitarianism, that is sum-ranking and interpersonal comparison of utilities (Bentham 1789, Harsanyi 1955, Hammond 1987). 

Thus in the first revolution in economic and social thinking we find its focus to have been on a scientific explanation of human action in accordance with the principle of natural liberty. But this very scientific approach led to a design of the market order, institutional order and social systems that got premised on optimality, equilibrium and individualism. Consequently, no substantive understanding of social interactions could be offered in explaining the passage towards a final equilibrium and optimal state of viable socioeconomic variables. When individuals lost their capacity to discourse even as they attained their assumed optimal and equilibrium states of happiness and freedom, they also lost the capacity of being ethically active. Ethics and markets thus got dissociated. Ethics became exogenous to economics and market function. 

Neo-Classicism

In the neo-classical economic school that followed the works of Walras, Jevons and Marshall, the classical economic ideas were perpetuated on the demand side of markets. Earlier, the classical economic school had focused on the supply side. Neo-classicism further entrenched the theory of self-interested preference behaviour of individuals into a theory of social optimum and equilibrium, albeit introducing such preferences into a systems view of multi-markets. 

Preferences in turn were treated as the origin of economic value in relation to relative prices. Relative prices of the neo-classical school explaining economic choice, and absolute prices of the classical school representing economic value had to be empirically observed. Hence all goods and services had to be measured. Even when numinous social goods and services entered exchange, they had to be treated within the purview of measurement in order to be considered in economic analysis. Encompassing these constrictions were the axioms of rational economic behaviour of agents, full or bounded information (hence bounded rationality), and measurable probability of uncertain events. This convenience was essentially required for determining the structure and bounds of a reductionist economic space. Reductionism is not even limited to economics in such doctrines. It is found inherent in the sciences as a whole. Against this constricted view of science Dampier has written his incisive critique (Dampier 1961). Such a priori needs for boundedness to attain assumed states of optimality and equilibrium remained structurally invariant over time in the economic space. As a consequence of assumed predictive nature of economic reasoning, time in it becomes non-substantive in neo-classical economic theory (Robinson 1965, 1973). Prediction remains structurally unchanging as a prescribed human behaviour, irrespective of time-dependent change of the economic variables.

Institutions now are once again structurally embedded in the lateral aggregation of independent, optimal and equilibrium preferences as manifested by the utilitarian doctrine. Such a society-wide behavioural assumption in neo-classical thought is termed as methodological individualism. Because of such logical continuity of neo-classicism to classicism we will not treat this school as a distinct revolution in economic thought.

Neo-classical economic school introduced the method of marginalism to treat resource allocation among competing ends under scarcity. But in doing so they turned such allocation points into axiomatic long-run optimal and equilirbium points. Consequently, marginalism became a powerful method that intrinsically stayed in neo-classicism and gave it the abiding structural character of a non-interactive worldview. Marginalism thus explains non-interaction and relates this state to optimality, scarcity, and equilibrium in the long-run. By thus making individuals and institutions choose in the absence of systemic learning at the marginal points of resource allocation, the method of marginalism intensified the view of methodological individualism in neo-classical economic behaviour (Parson 1964).

Marx Briefly

For similar reasons, since Marx was an exponent of the classical economic school albeit with a much wider agenda of social interactions, we will subsume Marxism within classical economics. Yet it must be mentioned in the context of the theme of this paper that the great debility of Marxism despite its attempt to explain social interactions arose from Marx�s silent negation of markets and3 his duality of prices and values in the economic system (Mandell 1971,Ghosh & Choudhury 1997). Such dualism replaced the meaning of market exchange by institutional re-organization, principally of production rather than of consumption (Martinez 1990). In this, economic planning subsumed the market function. Historicism rather than praxis (von Mises 1976), which has its roots in markets and ethics, was made the explainer of economic change. Contrarily, as von Mises wrote (1960): "Theory as distinct from history is the search for constant relations between entities or, what means the same, for regularity in the succession of events. In establishing epistemology as a theory of knowledge, the philosopher implicitly assumes or asserts that there is in the intellectual effort of man something that remains unchanged, viz. the logical structure of the human mind."