The making of the classical theory of economic growth

The Making of the Classical
Theory of Economic Growth

One of the defining features of the modern world is the way we take economic
growth for granted. We worry, of course, but we worry about a slow down in
growth, or about falling behind in the race to grow. It was not always so. Before
the late eighteenth century, economic growth in its modern sense, that is, continuing growth in income and output over indefinitely long periods of time, was
simply not on the intellectual map. The ‘classical’ theory of economic growth,
magisterially set out in Adam Smith’s Wealth of Nations in 1776, marked an
epochal change in the way we think about economic life and, indeed, about
human society.
This collection of Professor Anthony Brewer’s essays focuses on the critical
developments in thinking that put the study of economic growth on the agenda.
It includes essays on David Hume and on Smith’s debt to him, on A. R. J. Turgot’s
achievement and on his relation to Smith, on various controversial aspects of
Smith’s theory, and on Edward West’s neglected contribution to developing the
theory further in the generation after Smith. It was Smith’s contemporary, Adam
Ferguson, who hinted at a role for technical change (‘invention’) as a source of
growth and it was John Rae, two generations afterwards, who was the first to
present a coherent account in which invention plays the primary role. This aspect
of the story is covered by essays on Ferguson, on Rae’s critique of Smith, and on
his treatment of invention.
This collection is tied together with a rigorous introduction and a new chapter
on capital accumulation and will be of interest to postgraduates and researchers
focusing on the History of Economic Thought and Economic Growth.
Professor Anthony Brewer taught economics at the University of Bristol from
1967 onwards, with spells as an academic visitor at Duke University, Chuo
University, and elsewhere. He is now retired, but still active in the subject, with
the title of Emeritus Professor of the History of Economics. He has been Secretary
and Vice-President of the European Society for the History of Economic

Thought.


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1 Economics as Literature
Willie Henderson
2 Socialism and Marginalism in
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3 Hayek’s Political Economy
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Steve Fleetwood
4 On the Origins of Classical
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Tony Aspromourgos
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Albert Jolink
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Michel Verdon
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Robert W. Dimand and
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Studies in the long-period theory
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19 Studies in the History of French
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30 The Social Economics of
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25 Marx’s Concept of Money
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Anitra Nelson
26 The Economics of James Steuart
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32 John Ruskin’s Political Economy
Willie Henderson
33 Contributions to the History
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Essays in honour of R. D. C. Black
Edited by Antoin E. Murphy and
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34 Towards an Unknown Marx
A commentary on the manuscripts
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Enrique Dussel
35 Economics and Interdisciplinary
Exchange
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36 Economics as the Art of Thought

Essays in memory of
G. L. S. Shackle
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27 The Development of Economics in
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Edited by A. W. Bob Coats

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Politics and economics in
post-Ricardian theory
Susan Pashkoff

28 The Canon in the History of
Economics
Critical essays
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38 Piero Sraffa
His life, thought and cultural
heritage
Alessandro Roncaglia

29 Money and Growth
Selected papers of Allyn Abbott Young
Edited by Perry G. Mehrling and
Roger J. Sandilands

39 Equilibrium and Disequilibrium in
Economic Theory
The Marshall-Walras divide
Michel de Vroey


40 The German Historical School
The historical and ethical approach
to economics
Edited by Yuichi Shionoya

49 Physicians and Political Economy
Six studies of the work of
doctor-economists
Edited by Peter Groenewegen

41 Reflections on the Classical
Canon in Economics
Essays in honour of
Samuel Hollander
Edited by Sandra Peart and
Evelyn Forget

50 The Spread of Political Economy and
the Professionalisation of Economists
Economic societies in Europe, America
and Japan in the nineteenth century
Massimo Augello and Marco Guidi

42 Piero Sraffa’s Political Economy

A centenary estimate
Edited by Terenzio Cozzi and
Roberto Marchionatti
43 The Contribution of Joseph
Schumpeter to Economics
Economic development and
institutional change
Richard Arena and Cecile Dangel
44 On the Development of Long-run
Neo-Classical Theory
Tom Kompas
45 F. A. Hayek as a Political
Economist
Economic analysis and values
Edited by Jack Birner, Pierre Garrouste
and Thierry Aimar
46 Pareto, Economics and Society
The mechanical analogy
Michael McLure

51 Historians of Economics and
Economic Thought
The construction of disciplinary
memory
Steven G. Medema and
Warren J. Samuels
52 Competing Economic Theories
Essays in memory of
Giovanni Caravale
Sergio Nisticò and Domenico Tosato

53 Economic Thought and Policy in
Less Developed Europe
The nineteenth century
Edited by Michalis Psalidopoulos and
Maria-Eugenia Almedia Mata
54 Family Fictions and Family Facts
Harriet Martineau, Adolphe Quetelet
and the population question in
England 1798–1859
Brian Cooper
55 Eighteenth-Century Economics
Peter Groenewegen

47 The Cambridge Controversies in
Capital Theory
A study in the logic of theory
development
Jack Birner

56 The Rise of Political Economy in the
Scottish Enlightenment
Edited by Tatsuya Sakamoto and
Hideo Tanaka

48 Economics Broadly Considered
Essays in honour of
Warren J. Samuels
Edited by Steven G. Medema,
Jeff Biddle and John B. Davis

57 Classics and Moderns in Economics,
Volume I
Essays on nineteenth and twentieth
century economic thought
Peter Groenewegen


58 Classics and Moderns in Economics,
Volume II
Essays on nineteenth and twentieth
century economic thought
Peter Groenewegen
59 Marshall’s Evolutionary Economics
Tiziano Raffaelli
60 Money, Time and Rationality in
Max Weber
Austrian connections
Stephen D. Parsons
61 Classical Macroeconomics
Some modern variations and
distortions
James C. W. Ahiakpor
62 The Historical School of Economics
in England and Japan
Tamotsu Nishizawa
63 Classical Economics and
Modern Theory
Studies in long-period analysis
Heinz D. Kurz and Neri Salvadori
64 A Bibliography of Female Economic

Thought to 1940
Kirsten K. Madden, Janet A. Sietz and
Michele Pujol

68 History and Political Economy
Essays in honour of P. D. Groenewegen
Edited by Tony Aspromourgos and
John Lodewijks
69 The Tradition of Free Trade
Lars Magnusson
70 Evolution of the Market Process
Austrian and Swedish economics
Edited by Michel Bellet, Sandye
Gloria-Palermo and Abdallah Zouache
71 Consumption as an Investment
The fear of goods from Hesiod to
Adam Smith
Cosimo Perrotta
72 Jean-Baptiste Say and the Classical
Canon in Economics
The British connection in
French classicism
Samuel Hollander
73 Knut Wicksell on Poverty
No place is too exalted
Knut Wicksell
74 Economists in Cambridge
A study through their correspondence
1907–1946
Edited by M. C. Marcuzzo and

A. Rosselli

65 Economics, Economists and
Expectations
From microfoundations to
macroeconomics
Warren Young, Robert Leeson and
William Darity Jnr.

75 The Experiment in the History of
Economics
Edited by Philippe Fontaine and
Robert Leonard

66 The Political Economy of Public
Finance in Britain, 1767–1873
Takuo Dome

76 At the Origins of Mathematical
Economics
The Economics of A. N. Isnard
(1748–1803)
Richard van den Berg

67 Essays in the History of Economics
Warren J. Samuels, Willie Henderson,
Kirk D. Johnson and
Marianne Johnson

77 Money and Exchange

Folktales and reality
Sasan Fayazmanesh


78 Economic Development and
Social Change
Historical roots and modern
perspectives
George Stathakis and Gianni Vaggi
79 Ethical Codes and Income
Distribution
A study of John Bates Clark and
Thorstein Veblen
Guglielmo Forges Davanzati
80 Evaluating Adam Smith
Creating the wealth of nations
Willie Henderson
81 Civil Happiness
Economics and human flourishing in
historical perspective
Luigino Bruni
82 New Voices on Adam Smith
Edited by Leonidas Montes
and Eric Schliesser
83 Making Chicago Price Theory
Milton Friedman–George Stigler
correspondence, 1945–1957
Edited by J. Daniel Hammond and
Claire H. Hammond
84 William Stanley Jevons and the

Cutting Edge of Economics
Bert Mosselmans

88 The Years of High Econometrics
A short history of the generation that
reinvented economics
Francisco Louçã
89 David Hume’s Political
Economy
Edited by Carl Wennerlind and
Margaret Schabas
90 Interpreting Classical Economics
Studies in long-period analysis
Heinz D. Kurz and Neri Salvadori
91 Keynes’s Vision
Why the Great Depression
did not return
John Philip Jones
92 Monetary Theory in Retrospect
The selected essays of
Filippo Cesarano
Filippo Cesarano
93 Keynes’s Theoretical
Development
From the Tract to the General Theory
Toshiaki Hirai
94 Leading Contemporary
Economists
Economics at the cutting edge
Edited by Steven Pressman

85 A History of Econometrics in France
From nature to models
Philippe Le Gall

95 The Science of Wealth
Adam Smith and the framing of
political economy
Tony Aspromourgos

86 Money and Markets
A doctrinal approach
Edited by Alberto Giacomin and Maria
Cristina Marcuzzo

96 Capital, Time and Transitional
Dynamics
Edited by Harald Hagemann and
Roberto Scazzieri

87 Considerations on the Fundamental
Principles of Pure Political Economy
Vilfredo Pareto (Edited by Roberto
Marchionatti and Fiorenzo Mornati)

97 New Essays on Pareto’s
Economic Theory
Edited by Luigino Bruni
and Aldo Montesano

98 Frank Knight and the Chicago
School in American Economics
Ross B. Emmett
99 A History of Economic Theory
Essays in honour of Takashi Negishi
Edited by Aiko Ikeo and Heinz D. Kurz
100 Open Economics
Economics in relation to other
disciplines
Edited by Richard Arena, Sheila Dow
and Matthias Klaes
101 Rosa Luxemburg and the Critique
of Political Economy
Edited by Riccardo Bellofiore
102 Problems and Methods of
Econometrics
The Poincaré Lectures of
Ragnar Frisch 1933
Edited by Olav Bjerkholt and Ariane
Dupont-Keiffer
103 Criticisms of Classical Political
Economy
Menger, Austrian economics and the
German Historical School
Gilles Campagnolo

106 Kalecki’s Principle of
Increasing Risk and
Keynesian Economics

Tracy Mott
107 Economic Theory and
Economic Thought
Essays in honour of Ian Steedman
John Vint, J Stanley Metcalfe,
Heinz D. Kurz, Neri Salvadori
and Paul Samuelson
108 Political Economy, Public
Policy and Monetary
Economics
Ludwig von Mises and the Austrian
Tradition
Richard M. Ebeling
109 Keynes and the British
Humanist Tradition
The moral purpose of the market
David R. Andrews
110 Political Economy and
Industrialism
Banks in Saint-Simonian
economic thought
Gilles Jacoud

104 A History of Entrepreneurship
Robert F. Hébert and Albert N. Link

111 Studies in Social Economics
By Leon Walras
Translated by Jan van Daal and
Donald Walker

105 Keynes on Monetary Policy,
Finance and Uncertainty
Liquidity preference theory and the
global financial crisis
Jorg Bibow

112 The Making of the Classical
Theory of Economic
Growth
Anthony Brewer



The Making of the Classical
Theory of Economic Growth

Anthony Brewer


First published 2010
by Routledge
2 Park Square, Milton Park,
Abingdon, Oxon, OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Avenue, New York, NY 10016
Routledge is an imprint of the Taylor & Francis Group,
an informa business
This edition published in the Taylor & Francis e-Library, 2010.

To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.
© 2010 Anthony Brewer
The right of Anthony Brewer to be identified as the author of this Work
has been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including photocopying
and recording, or in any information storage or retrieval system, without
permission in writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Brewer, Anthony, 1942–
The making of the classical theory of economic growth / by Anthony Brewer.
p. cm.
Includes bibliographical references and index.
1. Classical school of economics–History. 2. Economics–History.
3. Endogenous growth (Economics) 4. Economic development.
I. Title.
HB94.B74 2010
330.15’3–dc22
2009045677
ISBN 0-203-85184-6 Master e-book ISBN

ISBN13: 978-0-415-48620-0 (hbk)
ISBN13: 978-0-203-85184-5 (ebk)

In memory of Alan West Brewer (1915–2007)



Contents

Acknowledgements
Note on the text

xv
xvi

PART I

The invention of economic growth

1

1

Introduction

3

2

The concept of growth in eighteenth-century economics

12

PART II

The Scottish tradition from Hume to Smith
3
4
5

37

An eighteenth-century view of economic development:
Hume and Steuart

39

Luxury and economic development: David Hume
and Adam Smith

59

Adam Ferguson, Adam Smith, and the concept of
economic growth

80

PART III

Accumulation and growth: Turgot and Smith

95

6

Turgot: founder of classical economics

97

7

Turgot, Smith, and capital accumulation

111


xiv

Contents

PART IV

Growth, saving and distribution

127

8 Adam Smith on classes and saving

129

9 Rent and profit in the Wealth of Nations

144

10 Edward West and the classical theory of distribution
and growth

163

PART V

Epilogue: John Rae and technical change

175

11 Economic growth and technical change: John Rae’s
critique of Adam Smith

177

12 Invention

187

Index

201


Acknowledgements

I would like to express my thanks to the publishers and editors of the journals
and books listed below for permission to reproduce previously published

materials.
Chapter 2. The Concept of Growth in Eighteenth-Century Economics, History of
Political Economy, 27, 1995, pp. 609–38.
Chapter 3. An Eighteenth-Century View of Economic Development: Hume
and Steuart, European Journal of the History of Economic Thought, 4, 1997,
pp. 1–22.
Chapter 4. Luxury and Economic Development: David Hume and Adam Smith,
Scottish Journal of Political Economy, 45, 1998, pp. 78–98.
Chapter 5. Adam Ferguson, Adam Smith, and the Concept of Economic Growth,
History of Political Economy, 31, 1999, pp. 237–54.
Chapter 6. Turgot, Founder of Classical Economics, Economica, 54, 1987,
pp. 417–28.
Chapter 8. Adam Smith on Classes and Saving, in From Classical Economics to
the Theory of the Firm: Essays in Honour of D. P. O’Brien, ed. R. Backhouse and
J. Creedy, Cheltenham: Edward Elgar, 1999, pp. 120–38.
Chapter 9. Rent and Profit in the Wealth of Nations, Scottish Journal of Political
Economy, 42, 1995, pp. 183–200.
Chapter 10. Edward West and the Classical Theory of Distribution and Growth,
Economica, 55, 1988, pp. 505–16.
Chapter 11. Economic Growth and Technical Change: John Rae’s Critique of
Adam Smith, History of Political Economy, 23, 1991, pp. 1–12.
Chapter 12. Invention, in The Economics of John Rae, ed. O. Hamouda, C. Lee
and D. Mair, Routledge, 1998, pp. 129–43.


Note on the text

With the exception of chapters 1 and 7, these essays have been published before.
They are reprinted here as nearly as possible without change, since it is confusing
to have different versions of the same material in the public domain. For that

reason, each chapter has its own set of notes at the end of the chapter and its own
set of references. The text (including bibliography and notes) is reproduced as it
was originally published, so some chapters use North American conventions
(double quote marks, and the like) while others follow UK conventions. Reference
may be made to different editions of original works in different chapters.
The result may sometimes be annoying, for which I apologise, but it is a consequence of the original decision not to revise the essays. I have, however, corrected
a very few simple typographic errors, and where there are references to papers
which are included in this collection I have added the cross-reference to the
chapter concerned.


Part I

The invention of
economic growth



1

Introduction

The ‘classical’ theory of economic growth, magisterially set out in Adam Smith’s
Wealth of Nations in 1776, marked an epochal change in the way we think about
economic life and, indeed, about human society. Before the late eighteenth
century, economic growth in its modern sense, that is, continuing growth in
income and output over indefinitely long periods of time, was simply not up for
discussion. Earlier writers, of course, worried about ways of improving economic
performance, of increasing wealth and improving living standards, or of increasing the share of the nation or of the city in international trade. None of this is the
same as the theory of continuing growth over the indefinite future found in Smith.

Pre-classical writers did not consider economic growth in this sense and reject it.
They did not consider it at all. It was not on the agenda.
Smith’s book changed all that. After the Wealth of Nations, growth rapidly
came to be taken for granted, so much so that it is difficult for modern readers to
recognize its absence from earlier writings. Modern economists, of course, do not
talk about growth all the time. They frequently focus on the sort of questions that
were under discussion before Smith. But growth is always in the background, so
well recognized that it is often unnecessary to mention it. Before Smith it wasn’t
mentioned, but because it had not occurred to anyone to consider it. Smith was
not the first to write about economics. He was not the father of economics, as has
sometimes been said, but he was, with Turgot (see below) the father of growth
economics.
The essays collected here are an attempt to contribute to the understanding of
this crucially important turning point in economic thinking. They were written
over a period of time, but as part of a sustained effort to understand classical and
pre-classical economic thinking on growth. They are not a random collection –
they hang together to make up a consistent view – but they were written, and in
most cases originally published, separately. Each essay, therefore, was written to
stand on its own and to deal with a particular aspect of the story, leading to a
small, but unavoidable, element of repetition between essays, for which I apologize. Each essay focuses on a topic on which I thought there was something to be
said that was sufficiently substantial and original to justify publication. Wellknown topics, where I saw no need to challenge the conventional wisdom, are
passed over, or mentioned only in passing. This introduction, therefore, aims to


4

The invention of economic growth

provide a brief overview, linking together the essays and filling in the gaps. The
previously published essays themselves are reproduced as they appeared originally, without any revision, because it would be confusing to have two versions

of the same paper in the public domain.1

The classical theory of growth
For present purposes, the classical theory of economic growth2 has three essential
features: (a) capital accumulation is seen as the primary source of economic
growth, (b) population growth is treated as endogenous, and (c) invention or, in
modern terms, technical change, is treated as secondary or relatively ignored.
Each of these three deserves some discussion.
(a) The role of capital accumulation is central. Unpicking it, the argument goes
like this. (i) People, on average, save. There are ‘prodigals’ who dissipate their
wealth, but they are not typical. Spending by the state (especially on wars) is a
greater danger, and there are catastrophes which destroy capital, but net saving is
normal in ‘almost all nations, in all tolerably quiet and peaceable times’ (Smith
1976: 343). (ii) What is saved is invested, either by the saver or by someone to
whom they have lent the money. Hence, capital accumulation is normal. (iii) The
incentive to save (and invest) is the profit return on investment. The idea of profit
as a regular form of income alongside wages and rent was new in the late eighteenth century. Earlier writers thought about profit as a form of wages or as an
irregular gain made by merchants who buy cheap and sell dear. In the classical
picture, capital investment is needed to employ workers and to provide them with
materials. Owners of capital (or ‘stock’) seek out profits, so capital is mobile
between different industries, with investment flowing to areas where profit is
high and tending to equalize profits (allowing for risk) across the system. Saving,
therefore, is directed by profit signals to where it is needed, and outputs of different goods match the demand for them. (iv) Accumulation of capital makes
growth of output and employment possible and, since the economic system works
to its full capacity, at least in normal times, accumulation ensures that growth
actually takes place.
(b) Population was assumed to be endogenous. If capital accumulation makes
it possible to employ more people, then population will (given time) expand in
line with the demand for labour. The mechanism is ‘Malthusian’ (though it goes
back well before Malthus). Population change is assumed to be a function of

income levels. At ‘subsistence’ level, incomes are just enough to maintain the
population from generation to generation, but no more. This is effectively a definition of ‘subsistence’. At lower levels of income, either people avoid having
children that they cannot afford to support, or mortality rates increase, because of
hunger and susceptibility to disease, to an extent which outweighs new births.
When incomes rise above subsistence, the population starts to grow. In a static
system with a constant capital stock, wages would settle at subsistence level,
since higher (lower) wages would lead to an expanding (contracting) population
and labour force and hence to more (less) competition for jobs, driving wages


Introduction

5

down (up) towards the subsistence level. In a growing system, the accumulation
of capital allows growing employment, the growing demand for labour bids
wages up, and in the long enough term, population grows in line with the demand
for labour. This view fits with the classical view of capital and accumulation. The
focus in classical economics is on working capital, required to pay the wage bill
and to pay for materials in advance of the sale of the product. Capital accumulation is important primarily because it allows increased employment, not because
of substitution of capital for labour or an increase in the capital–labour ratio,
though some of the later classical writers did consider some degree of substitution.
In the main story, capital accumulation leads to parallel, though not necessarily
proportional, increases in both capital and labour.
(c) Technical change (‘invention’) is not wholly ignored in classical economics, but it plays a secondary role. Smith, for example, cited the invention of
‘machines which facilitate and abridge labour’ (1976: 17) as one of the consequences of the division of labour, which in turn requires capital accumulation.
Invention thus falls into place in an account of growth driven by saving and accumulation.3 Before Smith, Adam Ferguson emphasized invention, though not,
I would argue, to the extent of basing a story of growth on it (see chapter 5). Later
on, John Rae criticized Smith’s theory and reversed the causal order. In Rae’s
story, invention is the primary cause of growth, while saving and investment,

though necessary, are passively induced by the profit opportunities created by
invention (see chapters 11 and 12).
In the classical view, then, given a reasonable level of peace and security, the
economy will grow over time as a result of the private, self-interested actions of
individuals who seek only to better their own condition (Smith 1976: 341). No
special external stimulus or policy change is needed, and no change in motivation
or habits. It is an essentially quantitative conception of growth, driven by the
growing quantity of accumulated capital. Any structural changes are the result,
not the cause, of growth.

Before Turgot and Smith
The idea of continuing growth on the lines summarized above is not found before
Turgot and Smith. That case is argued in detail in chapter 2, so I will not duplicate
the argument here. That chapter, however, focuses on the specific question of
the presence or absence of a concept of continuing growth, neglecting other ways
in which earlier writers helped to set the scene for the emergence of the developed
classical theory.
Richard Cantillon’s Essay on the Nature of Commerce in General was, arguably, the first attempt to understand the economy as an integrated system, held
together by market exchanges. (For a fuller treatment of Cantillon, see Brewer
(1992).) Turgot and Smith took much from him. In particular, his concept of
intrinsic value (equilibrium price) is essentially the same as Smith’s natural price.
In Cantillon’s account, if production of some particular good, agricultural or
manufactured, exceeds (falls short of) demand, the price and hence the returns to


6

The invention of economic growth

that line of production will fall (rise), inducing a shift of production away from

products in excess supply and towards those in short supply. Output thus adapts
to demand, and returns are equalized (Cantillon 2001: 30). Cantillon’s version
differs from Smith’s in that the return to capital plays no role in Cantillon – in the
developed Smithian version, the focus is on the flow of capital between sectors,
leading to equality in the profit rate (adjusted for risk and the like), but the effect,
the adjustment of output to demand, is the same. Cantillon recognized that individuals need capital to be able to set up in business, and that they have to get
an appropriate return on their investment (Prendergast 1991), but there is no
sign that he saw the availability of capital as a constraint on the overall level of
activity. In his account, the amount and fertility of the land is the ultimate
constraint. The basis of the economy is an essentially unchanging agricultural
sector. Manufacturing is not tied to the land in the same way, and a country can
expand manufacturing output and employment if it is successful in export
markets, importing food and other agricultural products to match. This, however,
is a zero-sum game, with one country gaining at the expense of others, and is not
at all like the continuing endogenous growth which Smith described.
François Quesnay took the next step forward, basing himself on Cantillon but
emphasizing the need for capital as a key constraint in agriculture, which he
regarded as the only productive sector. I argue in chapter 2 that he did not develop
that insight into a theory of continuing growth. He was very pessimistic, probably
unduly so, about the state of French agriculture and the French economy generally, arguing that output and population had fallen drastically over the preceding
century or so. He blamed taxation which fell directly on farmers, together with
restrictions on prices and on trade in grain, which held down agricultural returns.
In his account, improved policies could bring about a fairly rapid and potentially
large recovery, so his focus was on the short to medium term, not on long-term
continuing growth.
The emphasis on investment as the key to growth was substantially new and
represents a very important step towards Smith’s economics. Apart from the
exclusive emphasis on agriculture, the other major difference between Quesnay
and Smith from the present point of view is his treatment of profit and saving.
In the numerical examples which carry the main thrust of Quesnay’s argument,

an improvement of policy leads to an increase in farmers’ revenue. They are then
assumed to invest the whole of this gain, leading to very striking economic
expansion (in the numerical examples), but when leases come up for renewal the
whole gain, including the profit (net revenue) derived from the new investment,
is captured by the landlord in increased rent, bringing the expansion to a halt
since the landowner is not assumed to invest out of the increased rent. Whether
this is really the whole of Quesnay’s case is discussed more fully in chapter 2.
The point here is to note how different this is from Smith’s (and Turgot’s) treatment, in which individuals, from many (unspecified) ranks in society, save as a
matter of routine out of their normal incomes.
David Hume, by contrast, certainly recognized the fact of economic development in Britain in particular and Europe in general. His account of economic


Introduction

7

development is dealt with at length in chapter 3, while chapter 4 discusses the
connections between his ideas and those of Adam Smith. He is also discussed in
chapter 2. It is enough to say here that he presented an account of the transition
from a simple, and poor, agricultural society to a fully commercial system, a
transition which involved a large increase in output in agriculture as well as in
other sectors. His multi-volume History of England dealt mainly with political
and military events but also, in passing, applied his view of development to the
history of England from the Romans to his own times. Hume’s story is based
on changes in the set of goods available and changes in motivation, with consequences for economic institutions, for example the replacement of feudalism with
a constitutional monarchy. It is thus quite different from what I am calling the
classical theory of growth, which deals with quantitative expansion in an already
developed commercial system. There is, however, no conflict between the two:
Smith took over Hume’s story to account for the historical emergence of commercial
societies and added his own theory to account for continuing growth.

James Steuart substantially followed Hume’s account of economic development,
though with a less optimistic slant. He is discussed in chapter 3. Another Scot,
Adam Ferguson, deserves mention. His economic arguments are less substantial
than his contribution to other social sciences, but he did emphasize the potential
for technical change in a way that was unusual at the time. He is discussed in
chapter 5.
In sum, Cantillon and Quesnay, both based in France, made important contributions to the emerging analytical framework of classical economics but neither
had a theory of continuing growth. In Scotland, by contrast, Hume, Steuart, and
Ferguson had, in different ways, ideas about economic growth, or development,
(they did not use those words, of course) but did not start to construct a coherent
theory of continuing growth. That was done by Turgot and, to much greater
effect, Smith.

Turgot and Smith
The classical theory of economic growth, as I have defined it, was first set out
by Anne Robert Jacques Turgot in his Réflections sur la Formation et la
Distribution des Richesses of 1766, ten years before the Wealth of Nations. In
some respects one might argue that he went beyond Smith and anticipated
Ricardo. On the other hand, few read the Réflections at the time (or later) and
Turgot did not place any great emphasis on the growth theory implicit in his
arguments. Turgot deserves to be recognized as the first in the field, but it was
Smith who reshaped the way we all think. Chapter 6 deals with Turgot’s analysis.
Turgot and Smith met in early 1766, shortly before Turgot wrote the Réflections
and at a time when Smith was starting work on what became the Wealth of
Nations, so it is natural to ask whether one influenced the other, a question
discussed in chapter 7.
It goes without saying that the Wealth of Nations is one of the most important
landmarks in the history of economics, and also that economic growth is a central

8

The invention of economic growth

theme of the book. Turgot had the core theory, but well hidden in a work which
few read. Smith developed the argument at length in an immensely influential
work. Subsequent thinking on growth was shaped almost exclusively by Smith’s
version of the theory.
The main line of argument of the Wealth of Nations is identical to the ‘classical
theory’ summarized in the first section of this introduction. Saving is normal
and savers invest, so capital accumulation is normal, given market institutions
and a reasonable level of security. Population growth is endogenous, so accumulation leads to a progressively growing level of population, employment and
output. It is true that Smith stressed the gains from the division of labour in a
way that few before or since have done, but this does not alter the basic outline
of the theory since he also stressed that investment is a necessary precondition
of an extended division of labour, so it is still saving, converted into investment,
that drives the growth of output. Capital accumulation leads to growth in employment (matched, in the long run, by increased population through the endogenous
population mechanism), and the increasing scale of activity leads to gains
in output per head, through a greater division of labour. In Smith’s words:
‘The quantity of industry, therefore, not only increases in every country with
the increase of the stock which employs it, but, in consequence of that increase,
the same quantity of industry produces a much greater quantity of work’
(1976: 277).4
Chapters 2, 4, and 5 in this book deal with the relation between Smith’s theory
and those of his various predecessors; chapters 8 and 9 deal with particular
aspects of the Wealth of Nations.
As I have already stressed, saving plays an essential role in Smith’s theory of
growth. It is often said that he thought that landlords squander their income while
capitalists (profit earners) are the main savers. Chapter 8 shows that there is little
or no basis for this oversimplified claim. Smith’s emphasis was on the motives

and situations of individuals.
Smith’s account of wages, based on the endogeneity of population, was generally accepted by his successors for something like a century. It is not accepted
now because it depends on an assumption that higher wages will always lead
to population growth at a rate high enough to prevent wages from rising above
a certain level. In practice, in relatively developed countries, growth of output
ultimately outstripped growth in population, so that it made sense to think of
capital accumulation as (mainly) a cause of increased capital per head rather than
thinking of it as (mainly) a cause of matching population growth as the classical
writers did. Smith certainly thought that growth had raised wages well above
subsistence, in Britain at least, but he still thought of accumulation primarily as a
source of growth in both capital and labour rather than as a source of growth in
capital relative to labour.
Smith’s treatment of profits and rent, by contrast, was seen as less than satisfactory by his successors. It is often said or implied that Ricardo simply filled a
gap in Smith’s analysis. Chapter 9 argues that matters are not so simple. Smith’s
account was not in a simple sense weaker than Ricardo’s but it was different in