The Ethics of Capitalism, Class 3
1. 1770–1868: The “Golden Age” of Political Economy
The discipline of economics comes from a more inclusive academic discipline known as political economy.
Political economy combines the study of morality and justice (where economic matters are concerned) with
facts about economic causation and feasibility.
The central problem of the ‘Just’ Price: the price of goods should not exceed their value. On this view, the value
of a good is independent of how much someone values it. The medieval view of a just price held that economic
value and economic valuing are distinct: something’s price might or might not reflect the actual value of the
good. This leads to serious problems in economic thought. Consider the ‘diamond-water paradox’. The puzzle
is how water, which is necessary for survival and, hence, of very high value, cannot command as high of a price
as diamonds, which are a luxury. Adam Smith (1723–1790) would later divide value into two types: value in
use and value in exchange. Water, he claimed, was valuable in its use, while diamonds were valuable in
exchange. One popular solution to this problem was to think that value in use could only really arise from
labor: things become more valuable as we add our labor to them. This idea develops into the “labor theory of
value”, endorsed by all the great political economists of the golden age of political economy until the late 19th
century.
At this time the alternative view was mercantilism: The basic idea was that trade can either bring in finished
goods or currency. But finished goods can, for the most part, be made domestically, so there is no point in
importing them. Further, ships bearing imports will return to their home nations with valuable currency that
should be kept at home. The secret to increasing currency at home: focus on producing exports and hoarding
gold. The mercantilists argued that economic value came from holding hard currency like gold or value came
from exporting more than you bring in, and holding onto currency. Seems odd, but when you are always
expecting war, having substantial liquid currency available to finance warfare, while simultaneously depleting
your potential enemies of their currency, is a plausible strategy. Mercantilism was, therefore, an economic
theory of the state for the purpose of warfare.
Adam Smith largely wrote The Wealth of Nations to show the main flaws in the mercantilist argument. His
conclusion: when economies focus on more efficient production through the division of labor and trade, they
will become substantially richer than their gold-hoarding, export-obsessed mercantilist counterparts. With
Smith political economy moves from the public finance of monarchs to the question of how to improve the
welfare of the average person in society. Economic ideas and policy were now expected to improve the status
of the commonwealth as a whole, rather than just the rulers or the upper classes. The great “classical”
economists that followed Smith were all dedicated political and social reformers, and these reforms were largely
backed by their economic theories.
John Stuart Mill’s (1806–1873) Principles of Political Economy (1848): a key work of political economy. In it,
Mill took all the insight of the political economists who had come before him and drew new implications from
their theories. Many of Mill’s innovations involve subtle applications of his utilitarianism to economic theory.
He argues that inherited wealth, excessive rents to landlords, and certain methods of production cannot be fully
justified if they do not really contribute to the economic life of the society as a whole.
Karl Marx (1818–1883) didn’t like capitalism. He accepted that capitalism was an inevitable stage in the
development of society, but he argued it was not the final stage. Though better than feudalism, Marx argued that
capitalism would give way to a more desirable and harmonious phase of human existence— communism. For
Marx, capitalism could never deliver economic justice. It had exploitation, class struggle, and oppression baked
into its very core. Injustice is the essence of capitalism, like sweat is the essence of exercise, pouring out of us
until we come to our senses and revolt against the system.
Discussion Questions
1. The fragmentation of academia has led to the acceptance of economics as a scientific discipline, distinct from
philosophy or law as more “interpretative” disciplines less concerned with predicting what will happen and
more concerned with what ought to happen. How intuitive do you find this distinction?
2. What do you make of the fact that, during the golden age of political economy, authors frequently sought to
do both at the same time?