Tuesday, April 11, 2006

Utopian and Dystopian Portraits of the Stationary State in Classical Economics

Adam Smith’s model of economic growth remained an influential model throughout classical economics. While Smith alluded to a period of zero economic growth—which was seen as an historical inevitability of economic growth even to non-Marxists of the classical period—it was Ricardo and Mill who expounded the analytical arguments for this so-called “stationary state.” I will argue that Ricardo’s portrait of the stationary state is a dismal and gloomy one, whereas John Stuart Mill’s “happy-face” portrait of the long-run economy is a splendid society.

David Ricardo modified the growth model by including diminishing returns to land. The basic idea is that output growth requires growth of factor inputs, but, unlike labor, land is “variable in quality and fixed in supply”. This means that as growth proceeds, more land must be taken into cultivation, but land cannot be “created”. This has two effects for growth: firstly, increasing landowner's rents over time (due to the limited supply of fertile land) cut into the profits of capitalists from above; secondly, wage goods (from agriculture) will be rising in price over time and this then cuts into profits from below as workers require higher wages. Growth is, however, primarily due to the saving and investment of the capitalist class since the other classes (laborers and landlords) are said not to increase the nation’s capital stock of investment. For Ricardo, the profit of the capitalists is crucial. With Mill, as shall soon see, it is the institutions which are crucial.

The Ricardian model for economic growth, which Mill largely accepts, proceeds as follows. (1) The economic growth caused by investment leads to an increased demand for laborers.

(2) Wages then rise above the subsistence level. This will cause

(3) a Malthusian increase in population (increasing geometrically) which then causes

(4) and increase in the demand for agricultural foodstuffs (increasing arithmetically), which can only be met by

(5) an increase cost of production and hence

(6) a rise in the price of food. Due to the Iron Law of Wages, higher food prices lead to

(7) higher wages which ultimately

(8) equilibrate with the profits of the capitalist class.

The important point is that there are no net profits by the time the economy reaches step 8.

All the capitalists can do at this point is maintain the existing level of capital and thus production. It is worth noting that this model introduces a quicker limit to growth than Smith allowed, but Ricardo also claimed (at first) that this decline can be happily checked by technological improvements in machinery (albeit, also with diminishing productivity) and the specialization brought by trade. Ricardo was somewhat ambivalent about technology, however. On the one hand, he recognized that technical improvements would help push the marginal product of land cultivation upwards and thus allow for more growth. He noted that technical progress requires the introduction of labor-saving machinery.

This is costly to purchase and install, and so will reduce the wages fund. In this case, either wages must fall or workers must be fired. Some of these unemployed workers may be mopped up by the greater amount of accumulation that the extra profits will permit, but it might not be enough. A pool of unemployed might remain, placing downward pressure and wages and leading to the general misery of the working classes. This so-called stationary state, for Ricardo, was not a “many-splendored” thing.

However, Ricardo claimed that, in fact, machinery displaces labor and that the labor “set free” might not be reabsorbed elsewhere (because capital is not simultaneously “set free”) and thus merely create downward pressure on wages and thus lower labor income. In order to reabsorb this extra labor without this effect, then the rate of capital accumulation must be increased. But there is no obvious mechanism for this to happen—particularly given the tendency described above for profits and thus savings to decline over time.

Ricardo's portrait of the stationary state is somewhat more dystopian and pessimistic than Smith's. Or to use Carlyle’s word, dismal. The ultimately dismal portrait, however, was painted by Malthus with his famous claim that population growth was not so easily checked and would quickly outstrip growth and cause increasing misery all around—an utterly abject long-run economy.

For John Stuart Mill, salvation lies elsewhere. Mill is alarmed by the “tone and tendency of the speculations” of earlier economists who, like Ricardo, identify all the pleasant aspects of the long-run economy with the progressive state and all the unpleasant aspects with the stationary state. The basic Millian view of the long-run economy is just as Ricardian as the analytic model set forth in the third paragraph, for Mill tacitly consents to this model. Far from being an “end-of-history” approach, Mill contends, however, that since the stationary state is not as subject to wild fluctuations in capital investment and labor demands, the long-run economy reaches a happy and even-paced way of life. It is a more leisurely state, to be sure, one which later Marx will elaborate upon and famously describe a typical day in the commune where we fish in the stream after ploughing the fields. Mill even goes as far as to identify the stationary state with stronger tendencies towards full employment and the potential for reproductive prudence. Mill is not impressed by the political economists of the old school, he says, and he is “inclined to believe that [the stationary state] would be, on the whole, a very considerable improvement on our present condition.”

Mill’s long-run economy is utopian. No longer are human beings struggling to get on, “trampling, crushing, elbowing, and treading on each other’s heals.” We will find a state in which while no one is poor, no one desires to be richer, or suffers fear of being thrust back. Social mobility ceases to be of concern. But utopias have a tendency to be somewhat statist, and Mill certainly nods to paternalism in this sense. If it could be shown that a new laborer could not find employment in the stationary state by means of displacing older laborers, Mill believes that the “combined influences of public opinion might in some measure be relied on for restricting the coming generation within the numbers necessary for replacing the present.”

Not only does government have a larger role in sympathizing with the unemployed, but also a larger role in state intervention in general. Insofar as Mill believes that public opinion might be relied on for the necessary government programs, this relies in turn on the proper moral education of the citizenry and thus the proper institutional arrangements will need to be setup.

To sum up, Mill is disappointed with the conclusions of his predecessors. He sees no reason for associating the stationary state with dismal and unhappy outcomes. It is possible to believe, as do the modern environmentalists and sustainability activists, that the stationary state is more desirable than is often allowed. “I sincerely hope,” says Mill, “for the sake of posterity, that they [the dismal scientists] will be content to be stationary, long before necessity compels them to it.”

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