TLDR: is "In all my years studying and following Economics as an academic discipline, I never, ever heard the term Steady-State Economy. In every discussion of Macroeconomics, Growth was as assumed as the sky is blue."
And I am at long last relieved I'm not the only one thinking this is absurd.
This article also has a great section on the history of the idea, which has given me a clearer explanation for the flow of ideas from Smith to Ricardo than anything I've encountered, including Heilbronner's "Worldly Philosophers".
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Adam Smith's concept[edit]
Adam Smith's magnum opus on The Wealth of Nations, published in 1776, laid the foundation of classical economics in Britain. Smith thereby disseminated and established a concept that has since been a cornerstone in economics throughout most of the world: In a liberal capitalist society, provided with a stable institutional and legal framework, an 'invisible hand' will ensure that the enlightened self-interest of all members of society will contribute to the growth and prosperity of society as a whole, thereby leading to an 'obvious and simple system of natural liberty'.[36]:349f, 533f
Smith was convinced of the beneficial effect of the enlightened self-interest on the wealth of nations; but he was less certain this wealth would grow forever. Smith observed that any country in the world found itself in either a 'progressive', a 'stationary', or a 'declining' state: Although England was wealthier than its North American colonies, wages were higher in the latter place as wealth in North America was growing faster than in England; hence, North America was in the 'cheerful and hearty' progressive state. In China, on the other hand, wages were low, the condition of poor people was scantier than in any nation in Europe, and more marriages were contracted here because the 'horrid' killing of newborn babies was permitted and even widely practised; hence, China was in the 'dull' stationary state, although it did not yet seem to be declining. In nations situated in the 'melancholic' declining state, the higher ranks of society would fall down and settle for occupation amid the lower ranks, while the lowest ranks would either subsist on a miserable and insufficient wage, resort to begging or crime, or slide into starvation and early death. Bengal and some other English settlements in the East Indies possibly found themselves in this state, Smith reckoned.[36]:59–68
Smith pointed out that as wealth was growing in any nation, the rate of profit would tend to fall and investment opportunities would diminish. In a nation that had thereby reached this 'full complement of riches', society would finally settle in a stationary state with a constant stock of people and capital. In an 18th-century anticipation of The Limits to Growth (see below), Smith described the state as follows:
| “ | In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low. In a country fully peopled in proportion to what either its territory could maintain or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and, the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it had to transact, as great a quantity of stock would be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would everywhere be as great, and consequently the ordinary profit as low as possible."[36]:78 | ” |
According to Smith, Holland seemed to be approaching this stationary state, although at a much higher level than in China. Smith believed the laws and institutions of China prevented this country from achieving the potential wealth its soil, climate and situation might have admitted of.[36]:78f Smith was unable to provide any contemporary examples of a nation in the world that had in fact reached the full complement of riches and thus had settled in stationarity, because, as he conjectured, "... perhaps no country has ever yet arrived at this degree of opulence."[36]:78
David Ricardo's concept[edit]
In the early 19th century, David Ricardo was the leading economist of the day and the champion of British laissez-faire liberalism. Ricardo replaced Adam Smith's empirical reasoning with abstract principles and deductive argument. This new methodology would later become the norm in economics as a science.[2]:135f
In Ricardo's times, Britain's trade with the European continent was somewhat disrupted during the Napoleonic Wars that had raged since 1803. The Continental System brought into effect a large-scale embargo against British trade, whereby the nation's food supply came to rely heavily on domestic agriculture to the benefit of the landowning classes. When the wars ended with Napoleon's final defeat in 1815, the landowning classes dominating the British parliament had managed to tighten the existing Corn Laws in order to retain their monopoly status on the home market during peacetime. The controversial Corn Laws were a protectionist two-sided measure of subsidies on corn exports and tariffs on corn imports. The tightening was opposed by both the capitalist and the labouring classes, as the high price of bread effectively reduced real profits and real wages in the economy. So was the political setting when Ricardo published his treatise On the Principles of Political Economy and Taxation in 1817.[37]:6–10
According to Ricardo, the limits to growth were ever present due to scarcity of arable agricultural land in the country. In the wake of the wartime period, the British economy seemed to be approaching the stationary state as population was growing, plots of land with lower fertility were put into agricultural use, and the rising rents of the rural landowning class were crowding out the profits of the urban capitalists. This was the broad outline of Ricardo's controversial land rent theory. Ricardo believed that the only way for Britain to avoid the stationary state was to increase her volume of international trade: The country should export more industrial products and start importing cheap agricultural products from abroad in turn. However, this course of development was impeded by the Corn Laws that seemed to be hampering both the industrialisation and the internationalization of the British economy. In the 1820s, Ricardo and his followers – Ricardo himself died in 1823 – directed much of their fire at the Corn Laws in order to have them repealed, and various other free trade campaigners borrowed indiscriminately from Ricardo's doctrines to suit their agenda.[37]:202f
The Corn Laws were not repealed before 1846. In the meantime, the British economy kept growing, a fact that effectively undermined the credibility and thrust of Ricardian economics in Britain;[37]:223 but Ricardo had by now established himself as the first stationary state theorist in the history of economic thought.[2]:88f
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