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1. Classical Economics, Lecture 1
J.B. Say and His Followers

2. Rothbard’s Perspective
• Rothbard opposes what he sees as an older
standard view of economic history.
• In this view, economics began with Adam
Smith, The Wealth of Nations. (1776)
• Before Smith, economics didn’t really exist.
Smith refuted the fallacies of the
mercantilists.

3. The Older View
• After Smith, there were a succession of
great figures: David Ricardo, John Stuart
Mill, the marginalists ( Menger, Jevons, and
Walras), Alfred Marshall, and Lord Keynes.
• A problem for people who hold this view is
who follows Keynes?

4. Rothbard Rejects the Older View
• Rothbard rejects this view of economic
history.
• He says it is a Whig Interpretation of
History. This expression comes from
Herbert Butterfield. In the Whig
Interpretation, things are always getting
better until we reach the present.

5. The Whig Interpretation
• Applied to economics, the WI holds that
knowledge has continually increased.
• What are Rothbard’s criticisms of the WI?
• Knowledge can be lost. Rothbard thinks that basic
knowledge of value theory was lost after Adam
Smith.
• Rothbard was very much influenced by Thomas
Kuhn, The Structure of Scientific Revolutions
(1962).

6. Rothbard and Thomas Kuhn
• Rothbard accepts Kuhn’s view of competing
paradigms. Different scientific theories have
fundamentally different assumptions. A new
theory isn’t the old theory + improvements.
• Rothbard disagrees with Kuhn about whether a
paradigm is better than the one it replaces.
Rothbard does believe you can say this. He thus
accepts progress in economics.

7. Another Rothbard Criticism
• Rothbard also criticizes the older view
because it concentrates on just a few great
thinkers.
• He says that a history of economic thought
has to concentrate not just on the top
figures, but less important members of each
economic school as well. Rothbard was
influenced by Quentin Skinner here.

8. A Problem for Rothbard
• Rothbard wants to downplay the importance of
Adam Smith in favor of the French tradition of
Turgot and Cantillon. ( He was Irish but spent a
great deal of time in France.) This tradition
stresses utility rather cost of production, as Smith
did.
• Say fits into Rothbard’s picture; he was a French
theorist who stressed utility. But he considered
himself a follower of Smith. How can this be
made consistent with Rothbard’s account?

9. Rothbard’s Solution
• Rothbard says that the French economists
associated the French economic tradition with the
physiocrats.
• The physiocrats were discredited because they
supported absolute monarchy. Also, they held
implausible views, e.g., that only agriculture was
productive.
• Despite calling himself a Smithian, Say had many
criticisms of Smith. E.g., he said that Smith was
not systematic.

10. Say on Method
• Say’s most important book was his Treatise
(Traité), which was published in 1803.
• He was the first economist to write explicitly
about economic method.
• Rothbard thinks that he anticipated praxeology,
the science of human action.
• Say first asked, is economics an empirical
science? That is, does it deal with the real world?
He answered that it does.

11. Method Continued
• He criticized the physiocrats and also David
Ricardo for introducing arbitrary axioms that
weren’t true.
• This is a point that is often missed when studying
praxeology. People sometimes ask, how do we
know that the deductions about the concept of
action apply to the actual world? The answer is
that actions occur in the real world.

12. More Method
• Say distinguished between general and variable or
particular facts. Economics is concerned with
general facts, These are always the same. They
don’t require testing but can be reasoned about
deductively.
• Mathematics isn’t suited for economics. There are
too many variable events that help determine each
particular economic fact for mathematical or
statistical analysis to be useful.

13. Theory Versus Facts
• Because there are so many variables involved in
each particular economic event, you can’t explain
what happens without appealing to an economic
theory.
• It’s wrong to argue, e.g., that prosperous nations
often have followed a high tariff policy, so tariffs
cause prosperity. We need a theoretical account to
establish this: otherwise it is just a statement that
tariffs accompanied prosperity.

14. Theory Versus Facts Continued
• It might have been the case that the country
would have done better with free trade.
• In fact, we have good theoretical reasons to
think this; free trade increases the extent to
which the division of labor can operate. Say
emphasized the importance of the division
of labor, and did so with more insight than
Smith.

15. Exchange
• In contrast with Smith’s stress on cost of
production, Say explained prices through the
appeal to the utility of the consumer. Prices
depend on what consumers want.
• Say realized that the utility of a good to a
consumer is relative to how he ranks other goods.
He didn’t have the concept of marginal utility,
though, and thus he couldn’t fully solve the
diamond-water paradox.

16. Exchange Continued
• Say did not think that in an exchange, each person
values what he gets more than what he gives up.
• He wrongly thought that an exchange takes place
when the goods exchanged are of equal value. He
should have asked, “equal to whom?”
• There is a typo on p.20 that destroys the sense of
the sentence in which it occurs. ¶ 2, line 4: “But
Condillac insists. . .” should be “But Say
insists. . .”

17. Say Versus Ricardo
• Say’s emphasis on utility differed from Ricardo’s
theory.
• Ricardo acknowledged that only a good with
utility would have a positive price. If no one
wanted a good, then no one would pay anything
for it, no matter how much labor had been
required to make it. But once a good has utility,
labor cost determines its price.

18. Factors of Production
• Say applied his emphasis on utility to
factors of production also.
• The value of a factor of production like land
or labor depends on how much it will help
produce a good that consumers want. In
other words, the value of the consumption
good determines the value of the production
good

19. Factors Continued
• What about production goods that are used to
make other production goods? E.g., a machine
used to make other machines.
• Their value is determined by the value of the good
they help to produce, just like the value of the
first-level production good is determined by the
value of the consumers good it helps to produce.
• This stages of production analysis was carried
much further by Böhm-Bawerk and other
Austrians.

20. The Entrepreneur
• Say emphasized the entrepreneur.
Production doesn’t happen automatically,
through combining land, labor, and capital.
• Someone must speculate on what will make
money and bring the factors of production
together. This is usually the capitalist.

21. The Entrepreneur Continued
• The capitalist advances money to the owner
of the factors of production. E.g., he pays
workers before selling his product.
• He thus takes on considerable speculative
risk. His power of judgment is essential.

22. Say’s Law of Markets
• Say is most famous for his law of markets, which
was attacked by Keynes. Rothbard thinks that Say
was right.
• The law is that the demand for goods and services
consists of the supply of other goods and services.
We can see this most clearly in a barter economy,
but money doesn’t change things. Say viewed
money as a commodity.

23. Say’s Law Continued
• The law implies that there can’t be general
overproduction. Human wants are unlimited.
• Of course there be too much or too little
production of particular goods and services,
because of entrepreneurial error.
• The law should not be stated, “supply creates its
own demand”. The supply of one good usually
isn’t the demand for the same good.

24. Say on Taxation
• Rothbard thinks that Say was especially
good on taxation.
• Adam Smith tried to established canons of
taxation, such as ability to pay.
• For say, all taxation was bad—taxes should
be as low as possible.
• The state was predatory, not productive.

25. Destutt de Tracy and Jefferson
• One of Say’s most important colleagues
was Destutt de Tracy, who coined the term
“ideology”, meaning by it the study of
human action. He shared Say’s views
critical of government and in favor of the
free market.
• Both de Tracy and Say opposed Napoleon,
who attacked them.

26. Say,Destutt de Tracy and
Jefferson
• Both say and de Tracy influenced Jefferson. He
shared their hard money views and opposition to
paper money, government debt, and high taxes.
• He translated part of de Tracy’s Commentary on
Montesquieu himself, and arranged for someone
else to translate the full work. He also helped in
the translation of Say’s Treatise.